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Private Equity Rules
According to a panel of senior buyout managers at the recent SuperReturn conference in Munich, the current “overhang” of worldwide private equity capital is $200 billion. That’s $200 billion looking to find a home in private equity stock. Perhaps oddly, none of the panelists saw this as a problem.
Thanks to the financial weakness and timidity of many corporate buyers, well-heeled equity firms are now seeing less competition when purchasing assets. “It’s a saner market where you can buy corporate spin-outs at six times cash flow”, said one participant.
John Muse, of Hicks Muse Tate & Furst, observed that private equity players were also bidding conservatively in auctions, thereby reaping some of “the best relative value opportunities in the market in the last 10 years”.
Other attendees said that much of the current overhang of capital could be worked off -- for instance in active areas such as the European mid-market -- and that the negative impact of capital overhang was more than offset by the current paralysis among both operating company and financial buyers put off by the current market uncertainty.
It’s that uncertainty or market volatility that appears to be the show-stopper. As one participant said, “Things are moving too quickly. What we need is more stability.”
But for buyers, even this volatility can be positive. Sir Ronald Cohen of Apax Partners argues that in recent years such volatility has turned public markets into unfriendly environments for listed companies trying to create value over the long run. Add to this the new wave of public company regulation and related escalating expenses inspired by recent corporate malfeasance, and you’ve got growing opportunity for private equity investors to take public companies private, especially the smaller ones where the fixed costs of public status are even more burdensome.
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