Private Equities

[millionairemind]

Debt linked to huge buyouts is tightening the vise
By Andrew Ross Sorkin and Michael J. De La Merced Published: November 3, 2008


Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys "R" Us.

The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.

So, like homeowners with an adjustable rate mortgage that just went up, some of private equity's titans are facing a huge squeeze. And that is coming at the same time consumers are staying home with their wallets closed.

Already this year, big retailers backed by private equity, like Linens 'n Things, Mervyn's and Steve & Barry's, have filed for bankruptcy.

Analysts expect an even broader array of companies backed by private equity — including resorts like Harrah's Entertainment and lenders like GMAC, the financing arm of General Motors — to face even more pressure as profits shrivel and creditors come knocking.


"There's absolutely going to be a lot of pain to go around," said Josh Lerner, a professor of investment banking at Harvard Business School. "The big question is how apocalyptic it will be."

Private equity firms, which are lightly regulated, use investors' money to buy undervalued public companies and take them private. The difficulty of companies that have been acquired by private equity firms to get new credit could have enormous implications for the economy.

People who work for companies owned by private equity firms could lose their jobs as firms cut costs to meet their debt obligations. And private equity firms like Apollo Management, which owns Harrah's and Linens 'n Things, face deep markdowns on the value of their holdings.

Pension funds and college endowments that invested their money into in these funds in recent years hoping for big returns are likely to suffer as well, and many of those investors could face a cash squeeze, as they are forced to hold onto their investments for years until the economy recovers.

"The dangling other shoe is now about to drop," said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management.

When the economy was booming, the firms made huge profits by cutting costs at their new acquisitions, improving operations and then turning around and selling them. In 2007, at the height of the bubble, such deals totaled $796 billion, or more than 16 percent of the $4.83 trillion in all the deals made globally that year, according to data from Dealogic.

Firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, faced an image problem at the height of the bubble for excessive compensation and beneficial tax treatment, but their returns were so high that even investors like pension funds were drawn in. Now these firms, built on enormous amounts of debt, are being forced to go back to the financial markets just as those markets have nearly frozen up.

If history is any guide, the worst may be yet to come. Steven Kaplan, a professor at University of Chicago Graduate School of Business, found that nearly 30 percent of all big public-to-private deals made from 1986 to 1989 defaulted. Afterward, private equity players were called to testify before Congress, and movies like "Wall Street" and "Other People's Money" depicted financiers as greedy criminals.

To be sure, many companies that were not purchased by private equity firms are also struggling. Circuit City, the longtime seller of consumer electronics, is trying to avoid filing for bankruptcy. And publicly traded automakers like General Motors are troubled, too. (GM wants to merge with Chrysler, which is owned by a private equity firm.)

Many industry insiders and analysts contend that companies backed by private equity will not suffer nearly as much as those in the late 1980s because the firms pushed for better financing conditions that allow them to keep operating even if they cannot make their debt payments.

For example, in an effort to save cash, six of Apollo's portfolio companies, including Claire's Stores, Harrah's and Realogy, have announced this year that they will pay some of their bonds' interest by issuing more debt.

Kaplan said he believed that while "it isn't going to be pretty," today's deals "are much less fragile and used less leverage." He contended that "on a relative basis to investment banks and hedge funds, private equity may be in a better place" because of its long-term focus.
Stephen Schwarzman, chairman of Blackstone Group, remains committed to the future of private equity. "The people rooting for the collapse of private equity are going to be disappointed," he said. While some companies may find themselves in trouble, he said, many more will be able to ride out a downturn in the economy because of the less restrictive financing conditions that banks agreed to earlier.

He added that he believed that now may be the best time for private equity because of the investment opportunities amid the crisis. "Historically, downturns are when the most money gets made," he said. Shares of Blackstone are hovering at around $10, down from the $31 they were at when Blackstone went public in June 2007. (Fortress Investment Group, another big firm, is trading at $4.90 a share, down from its initial price of $35 in February 2007.)

Lerner, of the Harvard Business School, said that trouble among private equity firms would probably "precipitate hard questions about the compensation and fee structure" in the industry. The firms generally take fees of 2 percent of all money managed and 20 percent of profits. "I would not be surprised if they try to head off the criticism by returning capital," he said.

The problem for the past deals is that many firms waded into economically sensitive sectors like retailing and restaurants. Firms like Apollo, Cerberus Capital Management and Sun Capital Partners purchased several troubled companies to turn around from 2004 through the first half of 2007.

In the case of Linens 'n Things, a longtime also-ran to Bed, Bath & Beyond, Apollo knew that it had a tough job ahead of it, yet it still added heavy debt. Two months before Linens 'n Things was acquired, it reported $2.1 million in long-term debt; by Dec. 31, 2007, that amount had exploded to $855 million.

At the time, private equity firms assumed that they could refinance their portfolio companies' debt cheaply. But many appear to have been blindsided by the size and severity of the credit market meltdown, which has left lenders unable or unwilling to provide more money.

In what seems a worrisome trend, many bonds of private equity-backed companies have recently plummeted in value, signaling worries about their solvency. These include Michaels, the crafts store co-owned by Bain Capital and the Blackstone Group; Dollar General, a low-price retailer taken private by Kohlberg Kravis Roberts; and Realogy, the parent company of the real estate brokerage firms Coldwell Banker and Century 21 that is owned by Apollo Management.

The bonds issued by Harrah's Entertainment, for example, were trading at 16.5 cents on the dollar, indicating investors' belief that the company was drawing closer to a potential default. Harrah's, too, was saddled with a lot of debt when it was taken private. A month before the completion of the Harrah's takeover, the company reported $12.4 billion in long-term debt. By June 30, that figure had swollen to $23.9 billion. Harrah's has already begun making selective staff cuts and has begun scaling back costs, even cutting back hours in its VIP lounge and the complimentary rooms and meals for its best customers.

"Unfortunately, the worst-case scenario is now looking like the best case scenario," analysts from CreditSights, a research firm, wrote in a research note on Oct. 17 about Harrah's. "While the company could be able to pull through unscathed, the market is giving little credit to do so."

[millionairemind]

KKR Delays Plans to Go Public Amid Market Turmoil (Update2)

By Martijn van der Starre and Elisa Martinuzzi

Nov. 3 (Bloomberg) -- KKR & Co. LP, the leveraged buyout firm run by Henry Kravis and George Roberts, delayed plans to go public for a second time in a year as the credit crisis eroded the value of its investments.

KKR, which plans to convert to a public company by taking over the Amsterdam-listed buyout fund it created in 2006, won't complete the transaction until next year, KKR Private Equity Investors LP said in a statement today. KKR had planned to go public by the end of this year.

The delay follows a slowdown in the global economy and a slump in financial markets following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. KKR Private Equity said markets deteriorated further in October, after reporting a $649 million drop in the value of investments in the preceding three months.

``Investors are shunning all risk right now,'' said Ben Hauzenberger, who helps oversee about $51 billion at Swisscanto Asset Management AG in Zurich, including shares of the fund. Private equity firms can't assess how they will fund takeovers and realize investments as the credit crisis deepens, he added.

[winston]

Solid education George Chen and Kim Yeon Hee

Private equity firms, betting that Asia's obsession with childhood education is recession-proof, are increasingly investing in the fast-growing private learning sector.

While the technology, media and telecom sectors that typically attract venture capital are vulnerable to spending cuts in a global downturn, many Asian parents would make other sacrifices before scrimping on their children's education.

"To cut the budget for your child's educational costs is the last thing many parents in China and Asia will do, due to the tradition and culture in the region," said Andrew Qian, managing partner of advisory firm New Access Capital in Shanghai.

"So the education sector is a relatively safe area for investments," said Qian, whose firm has advised on about 20 deals valued at more than US$700 million (HK$5.46 billion) in total since 2003.

Last month, British private equity firm Actis led a consortium investing US$103 million in China's Ambow Education, which targets middle-school students who aspire to a coveted place at a mainland university.

In South Korea, private equity firm The Riverside became the top single shareholder in Wiz-Korea, a pre-school tutoring institute, with a 20 billion won (HK$117.33 million) investment, in a deal announced in September.

Last year, the Carlyle Group invested US$20 million in Topia Education, which runs tutoring institutes in South Korea.

Asia's education firms are keen to attract foreign capital to expand their share of markets where private training and education does not have a long history.

"They are not in fierce competition now, because the pie is growing, but they want to raise their market shares now with more capital before competition turns stiffer," said Park Jong Dae, an analyst at HI Investment & Securities.

Asian parents typically invest in their child in the hope and expectation their offspring will support them when they are old.

This relentless focus on education has triggered a boom in private supplementary education.

The northern Indian city of Kota, for example, attracts some 20,000 students to cram for entrance exams for the prestigious Indian Institutes of Technology. In Hong Kong, some highly paid tutors are minor celebrities.

In the mainland, the communist nation's "one-child" policy has further raised the stakes for many parents who place huge importance on schooling their often only child.

The mainland's education market grew to an estimated US$143 billion last year and there is still huge potential for the market to expand over the next few years, according to Actis.

In South Korea, the after-school tutoring service market reached 20 trillion won last year, according to its National Statistical Office, or 2.1 percent of gross domestic product.

Foreign capital is estimated to account for less than 10 percent of that total.

Besides young students, experienced workers are also expected to go back to school to improve their professional or language skills during a global economic crisis that has already led to thousands of job cuts worldwide.

"Many people become unemployed during an economic crisis, so it's time for you to recharge yourself," said Ran Wang, chief executive of investment bank eCapital, whose clients include Google and Microsoft.

English-language training is the most popular service in Asia's private education sector, with a handful of schools, including China's New Oriental Education & Technology Group listed in the United States.

Beijing-based Global Education & Technology Group, which prepares students for a British language exam, plans to raise at least US$100 million in a US listing. SAIF partners, a private equity firm backed by Japan's Softbank, is one of its investors.

Last year, an investment arm of insurance giant American International Group reportedly invested US$60 million in Avalon English, a major English- language school in South Korea.

But education firms are not immune to market sentiment.

Shares in Chungdahm Learning, which runs English teaching institutes, have lost more than a third of their value since a late-June IPO that drew applications for almost 300 times the 16 billion won in shares on offer.

In September, South Korea's Hansol Education, a domestic tutoring service targeting toddlers to high school students, said it would postpone its plan for an initial public offering of shares due to lower-than-expected valuations.

"New Oriental is a success story, but it also makes it more challenging for latecomers to tell an even more successful story when they want to go to the market," said Qian of New Access Capital, referring to New Oriental's 2006 IPO in New York.

REUTERS

[financecaptain]

Sure. Looked what happened to ABC investment. Supposed to be the largest education group in the world given that it was highly subsidised by the Australian Federal Government.
Looked at Informatics too. Good band name and expanded aggressively.
Investing in education has large accounting risk. If you do not understand its revenue model. There are so much deferred income.
And most failures come from too much capital are being invested in this type of businesses as they are supported by large PE firms. Excess capital are usually misused. This business is also subject to law of deminishing marginal returns. The marginal return of each new centre should decrease overtime and not the same. Technically this type of business do not need so much capital. Standards generally decline when group become too big.
If you think about it, entry barrier is low for this business. Franchise name may not last.

[kennynah]

informatics probably do alot of foreigners' business...people who need that "student visa" so they can be in singapore for other reasons.... if we continue to spread our legs wide and wetly welcome these people...informatics is among the many who will gain from this "open leg" policy...

[winston]

Softbank China Raising Yuan Fund

SHANGHAI (Reuters) - SB China Venture Capital, backed by Japan’s Softbank Corp (9984.T: Quote, Profile, Research, Stock Buzz), is raising its first yuan-denominated investment fund with an initial target size of up to 2 billion yuan ($293 million), people with direct knowledge of the matter said on Monday.

SB China aims to complete the fund-raising before the end of this year or early next year and it will cooperate with an investment arm of the Shanghai city government to launch the fund, said the sources, who declined to be identified before an official announcement is made to the public.

The fund, to be managed by SB China as its general partner, will focus on the fast-growing high-technology sectors in China, especially in Shanghai’s Pudong New Area, they said.

SB China expects to attract capital from Chinese limited partners in eastern China, in particular Shanghai, Zhejiang and Jiangsu where the private economy is strong and growing rapidly.

“Yes, the market environment is tough, but demand for investments and wealth management services from these rich private entrepreneurs in China remains strong,” said one of the sources.

“Ideally, it would be great to raise 2 billion yuan but it would also be good to get a number like 1.5 billion yuan in the end,” he added.

Shanghai Pudong Science and Technology Investment Co Ltd, a city government-owned investment agency founded in 1999, is expected to become a major limited partner of the fund, the sources said, adding that no final agreement had been reached.

FOCUS ON HIGH-TECH

In 1990, Shanghai got the blessing of China’s paramount leader Deng Xiaoping to transform Pudong, a backward rural district opposite the city, into Asia’s future financial centre, that would one day surpass Hong Kong.

Pudong, formerly a marshland where Shanghai’s vegetables were grown, was once described by visiting Nobel Laureate Milton Friedman as a huge white elephant, much to the embarassment of his Chinese hosts.

To turn Pudong into a showcase for the world, the Shanghai government’s priorities are to develop the Lujiazui financial district, often dubbed as China’s emerging Wall Street, and Zhangjiang Hi-tech Park, China’s so-called Silicon Valley.

“To cooperate with Pudong New Area will be a shortcut for Softbank to tap the ample resources of high-tech companies based in Zhangjiang,” said another of the sources.

The first yuan fund of SB China will not only invest in high-tech sectors but also look for investment opportunities in China’s growth-stage companies in new energy, new material and manufacturing sectors, the sources said.

SB China, founded in 2000, has made a number of landmark deals, focusing on technology, media and telecom sectors. Its portfolio includes many market leaders such as Alibaba.com Ltd (1688.HK: Quote, Profile, Research, Stock Buzz), China’s top e-commerce firm, and Focus Media Holding Ltd (FMCN.O: Quote, Profile, Research, Stock Buzz), China’s top digital advertising firm. ($1=6.823 Yuan)

[winston]

DBS private equity arm sets up $100 mln China fund

SINGAPORE, Feb 26 (Reuters) - DBS Group's private equity arm said on Thursday it set up a $100 million fund in China to invest in unlisted companies there.

"The initiative reinforces DBS' commitment to expand its franchise in the country, and underscores the bank's conviction in the strength and potential of the Chinese economy," the Singapore bank said in a statement.

Melvin Teo, managing director and head of DBS Private Equity, told reporters the fund will take minority stakes in mid- to late-stage growth companies with plans to list on China's domestic A-share market.

"We find the opportunities have increased as companies look to shore up their capital in the current environment," he said.

Teo said DBS Private Equity has to date invested around S$500 million ($327 million) across Asia, generating an internal rate of return (IRR) of around 30 percent.

In the case of DBS' previous private equity investments in China, the IRR had been in line with the industry norm of over 100 percent, he said, adding future returns on the mainland will likely be lower because of increased competition.

[winston]

Franklin Templeton raises $383 mln for Asian property fund

SINGAPORE, March 17 (Reuters) - U.S fund manager Franklin Resources said on Tuesday it had raised a $383 million Asian real estate private equity fund to invest in cheap and distressed assets in the region.

The global market turmoil and reduced access to financing have created unique investment opportunities in both the developed and emerging Asian property market, the fund manager, which operates as Franklin Templeton, said in a statement.

Commercial property prices in financial centres Singapore and Hong Kong are tipped to fall 50-60 percent over the next couple of years as banks and fund management firms slash jobs and rent less space, analyst say.

As banks cut their exposure to property, landlords in Japan, China, India, Australia and other countries could be forced into firesales if they fail to refinance loans, putting more properties on the market and driving values down further.

"We believe that 2009 and 2010 should provide excellent opportunities for real estate investing in Asia," Glenn Uren, the fund's portfolio manager said. "Savvy investors are cautiously exploring the region looking for undervalued and distressed assets." Franklin Templeton, which has been investing in Asian real estate for the past 12 years, also transferred two senior staff members to Singapore and Hong Kong to focus on real estate.

Wenning Jung, vice president, relocated to Singapore office from California and Donna Ming-Yuan Lee, research analyst relocated to the Hong Kong office from New York, the statement said.

[winston]

I recalled Lena mentioning somewhere to keep an eye on where the big money are focussing. It seems that they are now setting up funds to invest in Asian Property ...

=====================================================


- Institutional funds and private banks are scouting for property assets in Asia Pacific, with SG Private Banking, which has just set up a center in Singapore to focus on real estate, hoping to invest another $500 million in Asian property by the end of 2010.

[financecaptain]

Real Estate and Distressed Investments are the 2 big themes for the big PE funds now.
Realistically, few deals will be struck along this lines although several funds have been declared closed. There is still big gap on selling and buying prices. It will persist for at least 6 months because the global economy is not at its worse yet.
For venture investments, the big theme is clean or alternative energy.
You are likely to see more deals closed in this area as there is less pricing issue and deal size is generally smaller.