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Private Equity Buyouts: Predictions for 2009 Panel Discussion

January 16th, 2009 10:47AM by Brendon Kensel
Private Equity Buyouts Panel

From left to right: Brendon Kensel, Managing Partner of Kensel & Co.; Phil Thompson, General Partner of Alta Communications; Alexander Haislip, Senior Editor of Thomson Reuters' Private Equity Week; Scott Honour, Senior Managing Director at The Gores Group; and Craig Frances, M.D., Managing Director at Summit Partners.

This fall I chaired a private equity event focused on buyouts and predictions for 2009 that was hosted by Pepperdine’s Graziadio Alumni Network of Orange County. The panelists included: Scott Honour, Senior Managing Director at The Gores Group; Craig Frances, M.D., Managing Director at Summit Partners; and Phil Thompson, General Partner of Alta Communications. The panel was moderated by Alexander Haislip, Senior Editor of Thomson Reuters’ Private Equity Week.

In 2008 there was a 30 percent decline in M&A activity according to a recent study by KPMG. Debt became scarce and expensive and many firms began hoarding cash. Loans backing leveraged buyouts fell 61% to about $21.5 billion during the third quarter of 2008, according to data from Thomson Reuters. The drop put the breaks on deal making.

Summit Partners is currently investing from a $3 billion buyout fund that it raised in 2005. The Gores Group raised $1.3 billion for its most recent buyout fund in 2007. Although neither firm relies solely on leverage, debt is an important part of what they do. Frances said that Summit might typically have borrowed up to 6x a target company’s earnings to get a deal done in 2008. Now that multiple has fallen to 3x earnings. Honour said that Gores has gone from 2x earnings leverage to 100% equity in its transactions. According to Thompson, Alta Communications, which last raised a $500 million fund, also has reduced the leverage it uses in transactions.

Frances attributed the “crisis of confidence” to three key factors: a housing bubble whose early indicators of distress were ignored, the availability of cheap money as “the Fed kept rates too low for too long,” and banks attempting to do too many things, chasing money as traders rather than as advisors.

As for remedies, Frances advocated widespread changes to accounting principles, while Honour suggested that consumer finance habits must change and that lenders need a reason to start lending again — both to consumers and to each other.

The main reason leverage ratios are falling is that GE Capital has shut its checkbook. “You had GE lending to a quarter of the middle market buyout deals,” Frances said. “We had a couple of deals we were working on with them where they said they weren’t doing any lending. It wasn’t a matter of multiples.”

Honour reiterated that message. “We use GE a lot and they told us they were done for the year. When there’s that much dislocation, someone is going to step in.”

A video of the event can be found here: