April 30, 2013, was the day when Private Equity firms – the smart money, and among the greatest beneficiaries of the Fed’s money-printing and bond-buying binge – announced their intentions to the rest of the world. The occasion was the big PE shindig in Los Angeles, the Milken Institute conference. The heavy hitters were there, and they let fly some pungent words during a panel discussion.
“We think it’s a fabulous environment to be selling,” said Leon Black, CEO of PE giant Apollo Global Management. With stock markets having more than doubled since their 2009 lows, average prices for leveraged buyouts have jumped to nine times earnings, he said. His firm had already dumped about $13 billion in assets over the last 15 months. “We’re selling everything that’s not nailed down,” he said.
He wasn’t kidding. Just how desperate are they to dump their assets while they still can? They’re now trying to unload EP Energy, an oil and gas company that an Apollo-led consortium had acquired in May last year for $7.5 billion. Highly unusual: PE firms normally exit their portfolio companies after three to seven years. And who might pay top dollar at the peak of the market? Retail investors. So Apollo is scrambling to line up investment banks to push EP Energy out the door this year via a rush-job IPO, “three people familiar with the matter” told Reuters on Monday.
Apollo already dumped eight portfolio companies through IPOs this year alone. A ninth, Athlon Energy, filed for an IPO earlier this month. Also this month, EP Energy sold off three of its entities, raising $1.3 billion. Other PE firms are selling as well, including Warburg Pincus, which is hoping to unload Antero Resources in a $1 billion IPO. Sell, sell, sell.
And buying by PE firms? Not much so far this year. Outside of two big deals, Dell and ketchup maker Heinz, there were only five deals above $1 billion for a combined $16 billion. A dearth of deals just when capital, the crux of the PE business, has been plentiful and cheap – with yields, before the corporate bond market began to skid in early May, at all-time lows. In addition, PE firms have been sitting on massive piles of dry powder… $500 billion. They’re eminently able to buy, but they’re not willing. Sell, sell, sell.
The smart money pointed out the reason at the conference: “overvaluation in all traditional asset classes,” is how Apollo’s Joshua Harris phrased it. Whereupon Wilbur Ross, one of the world’s billionaires, retorted, “Sometimes it is better to hide.”
They’ve seen the bond market rout coming months ago. But unlike stock-market jockeys, PE firms can’t sell their assets with the click of a mouse. It’s a long process. It can take many months and is fraught with uncertainties and peril. If the markets dive after a deal has been negotiated, or if credit dries up, as it did during the Financial Crisis, deals can fall apart or get renegotiated. Bridge loans can get yanked. If it’s an IPO, it might be pulled. Or it might crash. PE firms have to start unloading before euphoria peaks.
But even the smart money makes epic mistakes in bouts of hubris and fits of miscalculation during times of hair-raising overvaluations and reckless risk-taking, typically an acquisition for a record amount that would make people shake their heads for years to come. The last such case happened, of course, at the cusp of the Financial Crisis.
In 2007, TXU, as the largest electric utility in Texas was called, was acquired in a $48 billion masterpiece of Wall-Street engineering, masterminded by KKR, TPG Capital, and Goldman Sachs. The largest leveraged buyout ever! Just before Wall Street collapsed and was bailed out. These mind-boggling geniuses, the smartest of the smart money, loaded up the company with $40 billion in debt. They were hoping that the utility, which relies heavily on coal-fired power generation, would gain a competitive advantage over gas-fired power plants; the price of natural gas would skyrocket because the US would run out of the scarce fuel and would have to import more and more expensive LNG. Alas, the US shale-gas drilling boom generated a “glut” of natural gas and prices plunged. So last April, the renamed Energy Future Holdings Corp proposed a prepackaged bankruptcy that would put some of its units into Chapter 11.
No one wants to make that mistake again.
Now the smart money is selling equities hand over fist, while retail investors are still buying them, and while analysts are still hyping their boundless opportunities. I even heard it again at a party, for the first time in years: “over the long term, you can’t lose money with stocks,” he said to soothe his nerves as the imploding bond bubble had started to take down the stock market.
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