Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
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.
So here’s something that has turned out to be prescient – from David Stockman’s The Great Deformation,
Chapter 23. The stock market in 2007 “had been taken over by
white-collar financial hoodlums who needed a trading fix every day” but
then were “asserting an entitlement” to policy actions “to keep the
casino running at full tilt,” he wrote. The Fed stepped in, and by “the
second week of October the market was up 10 percent, enabling the
S&P 500 to reach its historic peak of 1,565….” On Monday, its
intraday low was 1,561. Read…. David Stockman: When The Fed Capitulated To Financial Hoodlums
No comments:
Post a Comment