Bolstered by strong returns from private equity, investment portfolio returns for the California State Teachers’ Retirement System ended 2010 posting a 12.7 percent return and boosting market values to levels not seen since October 2008. Since March 2009, when global financial markets plunged into a historic worldwide economic recession, the CalSTRS investment portfolio has rebounded by more than $34.8 billion to $146.4 billion. “While we’ve set the groundwork for a slow but steady recovery, we still have to work through the losses we took in 2008,” said CalSTRS Chief Investment Officer Christopher Ailman. “Nonetheless, we’re beginning to see the first green shoots of a rebound from the financial crisis.”
Private equity fund managers expect to close more new deals in the coming year than they did during the past 12 months, according to the second annual PErspective study by BDO USA. Half of respondents expect to close three or more deals during the next 12 months. That’s compared to only 31 percent who reported closing three or more deals during the past year. More specifically, nearly 40 percent of respondents expect to close between three and five new deals in the coming year, while only 16 percent reported closing between three and five new deals during the past 12 months.
However, private equity professionals do not expect deal flow to bounce back to pre-recession levels anytime soon. According to the study, the majority (69 percent) of respondents do not expect del flow volume to return to 2007 highs until 2012 or later. Another 18 percent believe deal flow volume will never return to 2007 levels indicating that those were “bubbly times.”
“We’ve seen a steady increase in private equity activity in 2010 and while private equity professionals are not expecting a sudden boom, they are optimistic that this positive momentum will continue in the new year,” said Lee Duran, Partner and Private Equity Practice Leader at BDO. “With the increasing availability of debt and appetite for large deals returning, it’s likely that funds will be looking for not only more, but larger deals in 2011.”
According to Preqin, end of year results suggest the private equity deals sector has recovered following the financial crisis, with both the value and volume of deals and exits returning to, or exceeding, pre-crisis levels. All told there were 265 exits worth $72 billion in Q4 2010 – the highest quarterly figure on record.
811 private equity backed exits occurred in 2010, with an aggregate exit transaction size of $203 billion. This is almost three times the aggregate exit value seen in 2009, ($73.6 billion).
Global private equity deal flow has witnessed a resurgence during 2010 as a whole, with deal flow globally this year representing the strongest year for private equity deals since the onset of the global financial crisis. In particular, this year has been notable for a surge in both North American and European deals, with North American deal flow in 2010 more than double that witnessed during 2009 and European deal flow in 2010 almost three times the value of deals seen in the region in 2009.
According to the latest report from Preqin, a total of 484 private equity funds achieved a final close in 2010, raising just $225 billion, the lowest aggregate amount for six years. Many predicted a fourth quarter recovery, but this did not transpire; just $32 billion was raised by the 92 funds that reached a final close in the last three months of the year, the slowest fund raising quarter since Q3 2003.
“Fundraising in 2010 turned out to be just as challenging as many feared. Although there are many individual success stories, on an overall basis fundraising levels were extremely low. Looking forwards, conditions in 2011 appear far more encouraging. 54% of investors plan to invest more capital in 2011 than 2010, with only 15% investing less. Market conditions are improving, and with deals and exits occurring at the highest levels for some time, investors will have to increase investments to maintain allocations,” said Tim Friedman, Head of Communications at Preqin.
Preqin is expecting fundraising to exceed $300 billion in 2011, with a more dramatic increase coming towards the end of the year as top quartile managers close significant funds that have been launched recently or are in the pipeline.
2010 has revealed a renewed interest in large deals amongst PE investors. Since the beginning of 2009, PE investors have completed 94 investments of at least $500 million, according to the PitchBook platform. With 68 of those deals completed this year, 2010 has more than doubled the number of $500 million+ deals closed during 2009. Those 68 deals alone have included about $77.6 billion of capital. 2010 has also witnessed the closing of the six largest deals during the two-year time period. The bigger deals this year have been made possible by an increased availability of debt and a build-up of capital in PE investors' coffers.
Pitchbook Data - Seattle, WA
It looks like the unofficial mantra for the private equity industry, according to PitchBook's preliminary year-end data, was the old axiom, 'Everything is okay, as long as it is in moderation.'
Take deal flow for example. 2010 was up from 2009 but still well below the bubbly years of 2005-2007--which is just fine. Just take a look at 2008/2009 to see why. This year's deals also showed a much more moderate use of leverage, closer to a 50% level instead of the 70% level of 2006.
In the interest of returning to moderation, fundraising was down in a big way as PE funds continue to work through $485 billion of built up dry powder, and exits were up as firms work to return money to limited partners and reduce the number of aging portfolio companies.
Look for more details on these stats, as well as several others, in PitchBook's Annual Private Equity Breakdown 2011, which will be released next week.
Private Equity | Mergers & Acquisitions By Heidi N. Moore
After a long drought, companies and private equity firms may be ready to make deals again, oddly enough because of cash, debt and taxes.
Here are the main reasons why:
A consensus is emerging from several prominent dealmaking experts that mergers are coming back, largely because companies can now afford them. U.S. companies have a near-record $1.93 trillion of cash on hand, according to Federal Reserve data.
Low interest rates have spurred corporate borrowing and refinancing at unprecedented levels. Private equity firms, which are enthusiastic users of junk bonds, have driven junk volumes to an all-time record this year, according to new data from Thomson Financial.
Big borrowing is likely to continue. Analysts at investment bank Keefe Bruyette & Woods predicted that the Fed will keep interest rates low throughout 2011. That would keep the debt markets open for a long enough time for private equity, in particular, to refinance their companies’ crushing debt loads.
The potential of new stimulus in the form of tax cuts that will benefit companies and rich individuals. Congress is currently hammering those out.