Large Private Equity Managers Flex Remediation Muscles

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Large private equity firms are increasingly flexing their scale, balance sheets, restructuring experience and connections with creditors and limited partners to tighten control and enhance return potential on investments, says Fitch Ratings.

Recent examples include Apollo’s and TPG’s decision on Jan. 15 to voluntarily place the largest operating subsidiary of Caesars Entertainment Corp. into a Chapter 11 bankruptcy and KKR’s follow-on private placement investment in First Data Corporation last June.

While such activities can bring creditors’ competing interests to the forefront, they also underscore the fiduciary responsibility of alternative investment managers to maximize returns for their limited partners through all available means. To the extent that managers are able to translate these activities into enhanced returns (or minimized losses) it can serve to support future fundraising and the overall franchise, both of which are important rating considerations when assessing investment managers.

In the Caesars case, Apollo has deployed aggressive tactics in an effort to retain control despite minimal recovery prospects for the most junior creditors. Maneuvers have included the sale of assets to affiliates at attractive multiples, repaying junior intercompany debt at par and the release of parent company guarantees of the debt at the weakest subsidiary. Apollo’s reputation and long track record of achieving outsized returns on distressed-for-control situations has helped drive the managers’ efforts and built some consensus among creditors. However, others among Caesars’ creditors have aggressively pushed back, so further legal and court action is possible.

Fitch believes that the largest private equity firms have also become more willing to use their balance sheets as a strategic advantage. This was demonstrated with First Data last year, when KKR itself committed part of the funding for a follow-on $3.5 billion investment in the portfolio company it originally bought in a 2007 LBO. KKR made its investment through a combination of $500 million from its 2006 Fund, $700 million from its own balance sheet, and $2 billion in co-investments from third-party investors. Such maneuvers, while demonstrating flexibility, create the type of balance sheet concentration that can constrain a private equity firm’s rating, or, in a scenario where the investment becomes degraded, potentially pressure the rating.

The Caesars and First Data examples show that as large private equity firms have grown their balance sheets and connections with large limited partners that are increasingly interested in co-investment opportunities, there is greater access to investment capital to weather downturns and improve capital structure positioning for IPOs. A Preqin survey released last year supported the trend, pointing out that of the group of LPs surveyed who had already co-invested alongside a private equity firm, 56% planned to increase their activity in this type of investment over the next 12 months. The trend reduces the overall average management and carry fee percentages paid by large LPs, but allows PE firms to maintain or increase overall investment levels. The number of club deals, or transactions shared by more than one private equity firm, has declined as a result, because firms are able to write bigger equity checks by combining fund capital, with co-investment commitments, and balance sheet investment capacity.

In both the Caesars and First Data examples, private equity’s long investment cycle is providing the time to work through challenges, wait out market declines and achieve the debt reductions necessary to improve the prospect of achieving targeted returns on invested capital.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed atwww.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Private Equity Fund Managers Predict Modest Deal Flow in 2015

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Coming off of a strong year for private equity in 2014, industry leaders temper their outlook for 2015, according to the sixth annual PErspective Private Equity Study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations.

While 41 percent of private equity fund managers report closing more than five deals in 2014, only 8 percent expect to do so during the next 12 months. Instead, the vast majority (87 percent) of private equity sponsors expect to close between one and five deals in 2015, with the largest percentage (30 percent) of fund managers predicting they will close only two new deals in the year ahead.

“While this spurred an uptick in sector valuations, we expect to see purchase price multiples level off in the near term and interest in the sector to remain strong.”

These modest projections are mirrored in fund managers’ view of the current investment environment: 56 percent characterize the markets as either very or somewhat favorable, a decline from the 72 percent expressing a positive outlook in 2014. Another 36 percent go as far as to say today’s environment is somewhat unfavorable compared to only 24 percent who said so one year ago.

“Private equity experienced a big year in 2014, as the availability of cheap debt, overhang of dry powder and relative optimism about the U.S. economy contributed to a high volume of deal flow. Funds needed to deploy cash,” says Lee Duran, Partner and Private Equity practice leader at BDO. “While signs are still positive for 2015, fund managers are cautious, eyeing currently high price multiples, potential interest rate hikes and ongoing competition from strategic buyers as factors that could impact deal flow in the year ahead.”

Despite a modest overall outlook for 2015, fund managers say they expect their new deals and add-on acquisitions to be larger during the next 12 months than they were in 2014. One in four (25 percent) expect to invest between $101 million and $1 billion in 2015, compared to 17 percent who did so in 2014. Another 42 percent (vs. 36 percent in 2014) expect to invest between $30 million and $100 million. Only 4 percent of fund managers expect to invest more than $1 billion in 2015, indicating that 2015 could be the second consecutive year of few, if any, mega-deals.

According to private equity fund managers responding to BDO’s survey, private company sales and capital raises (43 percent) and private equity funds exiting their investments (41 percent) will be the key drivers of private equity deal flow in 2015.

Holding Periods Level, While Funds Look to Strategics for Greatest Returns

Following a strong year for sellers, only 58 percent of private equity fund managers say their current expected average holding period for investments is longer than it was 12 months ago. That’s the lowest percentage to report longer exit timelines since BDO began conducting its PErspective Private Equity Study in 2009. Of those who do expect longer holding periods, the largest percentage (39 percent) expect exit timelines to increase by 13 to 18 months.

Of the 42 percent of fund managers who report shorter average expected exit timelines, 29 percent expect holding periods to decrease by 7 to 12 months and 42 percent expect them to decline by 13 to 18 months.

While exit timelines have shifted, exit assumptions have remained fairly consistent, with 41 percent of fund managers reporting no change in their preferred exit routes when compared to 12 months ago. The largest percentage of survey respondents reporting a change (25 percent) say they have increased their focus on sales to strategic buyers and another 18 percent say they have increased their focus on sales to financial buyers.

These findings reflect expectations for returns: 73 percent of private equity fund managers expect sales to strategic buyers to generate the greatest returns during the next 12 months, followed by 14 percent who expect sales to financial buyers to be the most lucrative exit option. Fund managers report a conservative outlook on IPOs, with only 9 percent saying public markets will generate the greatest returns in the coming year.

“The U.S. IPO market experienced significant growth in 2014 and many private equity firms were able to capitalize on the momentum through public offerings,” says Ryan Guthrie, Partner in the Private Equity and Transaction Advisory Services practices at BDO. “We expect fund managers to continue to evaluate public markets as a viable exit option, while recognizing that it will be hard for 2015 proceeds to match 2014 levels.”

The top challenges fund managers anticipate when exiting current investments include the gap between buyer and seller pricing expectations (73 percent), followed by financial information uncovered by buyers’ third-party diligence providers (17 percent).

Manufacturing Tops Industry Charts for 2015

For the third year running, the largest percentage of fund managers (34 percent) cite Manufacturing as the industry providing the greatest opportunity for new investment during the next 12 months. Fund managers’ projections for investments in the Healthcare & Biotech and Technology industries remained nearly flat when compared to 2014, with 15 percent and 18 percent, respectively, identifying these industries as the leading investment targets for the year ahead.

“U.S. manufacturing was in high demand in 2014, driven by a number of factors including innovation, regionalization, reduced energy costs and the overall U.S. economy,” says Dan Shea, Managing Director with BDO Capital Advisors, LLC and a member of BDO’s Private Equity practice. “While this spurred an uptick in sector valuations, we expect to see purchase price multiples level off in the near term and interest in the sector to remain strong.”

When it comes to valuations, fund managers believe that Technology (70 percent), Healthcare & Biotech (67 percent) and Manufacturing (37 percent) are the most likely to be among the top three industries to experience increases during the next 12 months. Conversely, Retail & Distribution (57 percent), Natural Resources & Energy (53 percent) and Financial Services (52 percent) are among the industries most likely to experience decreasing valuations in 2015.

“Given recent fluctuations with commodity prices, it’s no surprise that fund managers are keeping a close watch on the oil and gas sector,” says Brad Ross, director with BDO’s Transaction Advisory Services. “With prices continuing to drop in the new year, private equity firms already invested in the industry may be concerned about their ability to turn a profit on new investments in the short term.”

These findings are from the sixth annual BDO PErspective Private Equity Study, which was conducted from November through December 2014 and examined the opinions of more than 125 senior executives at private equity firms throughout the U.S.

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Manhattan Venture Partners Launches, Dedicated to Insight, Access, and Opportunity to Direct Seconda

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Manhattan Venture Partners, a research-driven merchant bank focused on the emerging secondary market for late-stage private technology companies, announced today the launch of its business, helping entrepreneurs unlock needed capital while allowing unique access for investors to participate in an attractive asset class.

With more than 100 years of collective experience in venture capital and private equity, including many years working together in multiple capacities, MVP’s partners have created a company that provides insight into and understanding of secondary-market transactions and their considerable nuance.

Specifically, MVP provides insight for investors in the form of unbiased and cutting edge reports across the fields of tech, clean tech and renewable energy, capital formation and alternative investment structures. At the same time, MVP invests its own capital and capital it manages, and also connects stockholders with other investors who are interested in buying pre-IPO stock on the secondary market. In doing so, the firm has unlocked a relatively new asset class for efficiently divesting pre-IPO stock from lower-risk, growth-stage companies with a shorter time to exit.

“Until now, there has been a vacuum in the market which has been hard to access and difficult to navigate, with few firms dedicated to serving entrepreneurs who are seeking to unlock value in their stock and stock options,” said Evan Haymes, Managing Partner at Manhattan Venture Partners. “MVP brings transparency, structure, and best practices to a marketplace between investors and early employees and angels in what are now late-stage growth companies. Our process involves leveraging unparalleled insights and access to company and market dynamics. It’s our distinguishing feature and our core value proposition across the range of services and allocation opportunities that we offer.”

Venture capital investing is in the midst of key structural changes. Companies are staying private longer, raising significant rounds of late-stage private funding pre-IPO, and going public at substantially larger pre-money valuations than ever before. Public market investors are often unable to access these late-stage companies’ return potential. The longer gestation period as private companies has resulted in an increased percentage of overall value being created before an IPO, and has also resulted in increased demand for alternative sources of liquidity by founders, employees, and seed and angel investors.

MVP identifies opportunities early, and targets companies that are well capitalized by top VCs, have tremendous growth rates, and have lower risk with respect to the underlying business, technology and ability to execute a defined strategy. These companies have potential for a 2-3x return on invested capital within 30 months. MVP manages all aspects of a transaction by facilitating communication with buyer, seller and the company. Therefore, they are able to ensure efficiency and transparency in a company friendly and compliant manner to ensure that the proposed trade is closed.

“MVP provides access to those investors who will not get full or any allocation at an IPO. We understand the unique challenges that growth stage companies, their employees, and early investors face. We help with employee retention by unlocking the value in pre-IPO shares. MVP aligns with companies’ long term plans by alleviating short term pressures for liquidity from VCs and early employees,” said Jared Carmel, Managing Partner at Manhattan Venture Partners.

The partners comprise long-standing technology investors, entrepreneurs, and executives. Their experience includes principal investing, M&A financial advisory, private placements for VC-backed companies across verticals such as tech, clean tech and renewable energy, capital formation and alternative investment structures.

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LBC Credit Partners Provides $20,000,000 Second Lien Term Loan To Defiance Metal Products To Support

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LBC Credit Partners (“LBC”), a leading provider of financing solutions to middle market companies, agented a $20.0 million second lien term loan to Defiance Metal Products Inc., a portfolio company of Taglich Private Equity LLC. Proceeds of the loan were used to facilitate a recapitalization and a buyout of certain minority shareholders.

LBC Credit Partners served as Administrative Agent and Sole Lender for the second lien term loan facility.

Defiance Metal Products is headquartered in Defiance, Ohio and has production facilities in Ohio, Arkansas, Wisconsin and Pennsylvania. The company is a leading full-service, precision manufacturer of low to medium volume, complex, engineered components and assemblies for the commercial vehicle market. Defiance serves leading original equipment manufacturers in the medium to heavy-duty commercial truck, bus, military vehicle, agricultural vehicle and commercial construction equipment markets.

Taglich Private Equity LLC is a financial sponsor which has been investing since 2001 in lower middle market manufacturing, business service and consumer product companies. They have completed transactions totaling over $500 million funded primarily with capital provided by Taglich Brothers, Inc., a full-service brokerage firm managing capital in both public and private investments.

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Monument Capital Group Holdings LLC names Christophe Bejach as a Managing Director of European Opera

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Monument Capital Group Holdings LLC announced today that Christophe Bejach joined the firm as a Managing Director of European Operations.

Mr. Bejach comes to Monument Capital Group Holdings with a successful 22-year career in private equity finance. His duties to Monument Capital Group Holdings LLC (MCGH) include expanding the European impact of the international investment holding company focusing on the global security industries.

During Mr. Bejach’s 7-year position as executive board member of the Edmond de Rothschild Group’s holding company in France, he has profitably founded two midcap private equity funds, and the “L’Avion” airline.

From May 2012 to January 2014, Mr. Bejach served French Minister of Economy and Industry Arnaud Montebourg, advising on national industrial policy. He held responsibilities pertaining to the industries of aerospace, defense, energy and mining.

“Having Christophe join the Monument Capital Group Holdings team is a valuable addition to our European presence,” said Douglas B. Baker, Managing Partner and Co-Founder of MCGH. “His range of experience as a principal investor in private equity and alternative asset investing will expand our international footprint and add value to the MCGH team.”

Mr. Bejach earned his Master’s in Business Administration from Hautes Etudes Commerciales (HEC) de Paris, one of the world’s most renowned business schools. Prior to that, he completed his master degree in computer sciences and applied math. In 2006, Mr. Bejach co-founded Terra Nova, one of the leading think tanks in France.

“With the appointment of Mr. Bejach, the firm is accelerating its international investment activities in the consolidation of the high growth, technology-based companies in the global security industries with a focus in cyber and critical infrastructure protection,” said Joel-Andre Ornstein, Chairman. “I am thrilled we have the opportunity to work together again, and have Christophe as a member of the MCGH team, on another unique and exciting project.”

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American Securities Closes $5 Billion Private Equity Fund at Hard Cap

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American Securities, LLC, a leading U.S. private equity firm, today announced the first and final closing of American Securities Partners VII, L.P. (ASP VII) with total capital commitments of $5 billion.  As a result of strong investor interest, American Securities closed the fund above the $4 billion target and at the hard cap the firm established at the outset of fundraising in September 2014.

“American Securities greatly appreciates the interest expressed in ASP VII by many long-standing relationships, as well as new investors, from the US and global investing community,” said Michael G. Fisch, President and CEO of American Securities.  “This new partnership provides us with further equity capital to support management teams in growing their businesses.”

American Securities invests in partnership with existing management teams of market-leading businesses, generally having $200 million to $2 billion of revenues and/or $50 million to $200 million of EBITDA.  The firm strives to be a long-term, value-added partner to the CEOs and management teams of the companies in which it is privileged to invest.  In deploying ASP VII, American Securities will pursue the same disciplined investment approach developed over the past 20 years and will aim to invest $200 million to $500 million of equity capital in each situation, although larger investments are also possible.

“ASP VII maintains the 25-year fund life potential of prior American Securities funds, thus permitting American Securities to remain invested in a company for many years and allowing management teams the flexibility to always act in the best long-term interest of their businesses,” stated David L. Horing, a Managing Director of American Securities, who along with Mr. Fisch is a Managing Member of ASP VII’s general partner. 

American Securities also plans to continue its tradition of investing with conservative financial structures.  CEOs of companies partnered with American Securities often comment that these aspects are beneficial to their businesses.  “We are a company with a long history of employee and management ownership, and American Securities has been a strong partner for us because of their long-term perspective coupled with their willingness to utilize lower leverage, which has provided greater flexibility to our business,” said Joe Chlapaty, Chairman and CEO of Advanced Drainage Systems, Inc. (WMS).

The firm is led by an experienced and cohesive team.  The Managing Directors on the Investment Team average more than 13 years at American Securities.  Bill Redmond, former President and CEO of General Chemical Corporation, commented on the capabilities and support that American Securities provides, “During our partnership, we benefitted greatly from the stability and insight of the American Securities team.  They helped us create value for all of our stakeholders.” 

In addition to the Investment Team, American Securities supports management teams with the Firm’s Resources Group, a team of functional experts available upon request by CEOs.  George Thanopoulos, CEO of Metaldyne Performance Group Inc. (MPG) explained, “American Securities has been a truly value-added partner.  We have been able to continuously access the Resources Group, particularly in the areas of information technology and human capital.  American Securities brought MPG talent and unique capabilities that we’ve not seen in other private equity firms.”  Since 2006, the Resources Group has included a strong China office to support management teams’ Asia-Pacific activities.  Dave Brooks, President and CEO of Unifrax Corporation, observed, “We chose to work with American Securities a second time because of the strong relationships we built with their team initially.  In addition, we wanted to expand our footprint in China and felt that American Securities’ local team in Shanghai provided valuable specialized expertise.” 

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2015 Private Equity Compensation Report Reveals Steady Growth Ahead

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The eighth annual Private Equity and Venture Capital Compensation Report, released today by PrivateEquityCompensation.com, indicates compensation growth in the private equity and venture capital markets is supported by strong fund raising.

“This year many funds hit their fund raising targets, so we were curious to see how this would impact both base salary and bonuses,” said David Kochanek, Publisher of PrivateEquityCompensation.com. “What we found is that private equity professionals’ base pay grew but not as fast as in previous years.”

The alignment between fund performance and individual bonuses was not as close this year, reflecting some potential alterations in the drivers of incentive compensation. “Usually, we see a pretty close correlation between performance pay and bonuses. Although bonuses accounted for 37 percent of total cash compensation, the tie to fund performance was not as clear this year,” said Kochanek.

Similar to last year’s results, the growth in cash compensation has slowed. Despite an increase in the number of hours worked, the average private equity professional earned $279,000 USD in cash compensation this year, about a 3 percent increase over last year.

For the MBAs in the private equity industry, their degree still provides an edge in compensation, although the gap narrowed this year. Last year a professional with an MBA could expect a 19 percent advantage in total compensation, this year that has narrowed to only 12 percent. It remains, however, that those with a graduate business degree tend to carry an edge in landing the highest paying positions.

The private equity job market looks bright for 2015 and beyond as respondents indicated their firms have increased hiring intentions in the coming year. Firms looking for investment professionals jumped to 41 percent this year, up from 34 percent last year. The big winners this year in terms of employment opportunity growth were the Accountants and Controllers. Firms looking for accounting talent jumped to 25 percent this year from only 14 percent last year.

Over the years of publishing the Private Equity Compensation Report, one trend is clear; the stronger the cash compensation trend, the less investment professionals are satisfied with their compensation.

In this year’s survey, only 45 percent of respondents indicated that they were satisfied with their compensation. This is a significant decline from just two years ago. “A combination of longer work weeks, a strong job market, and steady compensation growth has professionals wondering if the grass might be greener at other firms,” said Kochanek.

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