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Well-timed leveraged buy-outs generate the big bucks in private equity. Increasingly, though, the industry’s heavyweights want to try their hand at other pursuits. CVC Capital Partners has recently followed the likes of Carlyle Group in establishing a debt management business that will package up leveraged debt into collateralised loan obligations (CLOs).
Private equity needs robust Chinese walls when playing both sides of the buy-out game, which raises questions as to where the synergies will come from. There are several possibilities. First, private equity houses can use their brands to cross-sell to existing equity investors that also have a taste for debt. Second, the buy-out specialists and investment banks that syndicate leveraged buy-out (LBO) debt may prefer to have recognised names on the roster although they may not want rival private equity houses to get their hands on sensitive deal-related data, Chinese walls or not.
The industry is exploring other avenues too, inclu
ding infrastructure investments and taking minority stakes in listed companies. The strategic attractions are obvious. The core buy-out business is getting tougher, as competition drives down returns and potential targets circle the wagons. Just as the investment banks that helped broker the buy-out boom are already bolstering their distressed debt desks, so private equity houses are looking beyond merely raising another record buy-out fund. Among other things, being more than a one-trick pony makes for a better sales pitch for any partnerships considering a flotation.
Liability-matching by pension funds means there is ample demand for infrastructure funds. Meanwhile, huge appetite for structured products and low default rates mean CLO funds have been enjoying old-style returns on capital of more than 20 per cent. The flip side of that is the danger of potentially getting wiped out if credit conditions turn bad.
There is something disconcerting about the whole edifice: private equity’s creation of yet more CLO funds, which help buoy demand for LBO debt and thereby fuel more buy-outs, calls to mind a perpetual motion machine.
Source: Financial Times, February 12 2007
Lagt ut 28.06.2010
