Private Equity Starts Bubbling Up Again

by Tom Taulli | September 14, 2012 1:25 pm

Private Equity Starts Bubbling Up Again

After the financial crisis in 2008, the private equity industry has been in the doldrums. Now, there are signs that things are improving. For example, today’s Wall Street Journal[1] points out a recent surge in secondary buyouts. Essentially, these are acquisitions where the buyers and sellers are both private equity firms.

So far in 2012, the volume is about $28 billion, more than double the activity in 2011. Keep in mind that the peak was in 2007, when secondary sales reached $51.1 billion.

All in all, these transactions show confidence among dealmakers. They’re also an indication that low interest rates, such as on junk bonds[2], are a big driver. Consider that a typical private equity deal relies heavily on debt financing.

Another factor is taxes. There’s a possibility that the preferential 15% capital gains tax rate could increase next year, especially in light of the budget battles in Washington.

This year’s secondary volume is also showing that private equity firms are willing to pay nice premiums on valuations. Take a look at Carlyle Group (NYSE:CG[3]). The firm recently shelled out $3.3 billion for Getty Images. The photo company had gone private in 2007 at $2.4 billion.

However, the key for getting private equity back on track will be for a return of M&A and IPOs. These will provide juicy returns for buyout shops.

And yes, things look hopeful in that regard. Companies are sitting on huge piles of cash and need to find ways to grow their revenues. So why not buy more companies?

At the same time, the IPO market will probably get a lift as well because of the strength in the overall equities markets. As seen with the launch of QE3[4], there’s a strong foundation for a bull move.

Of course, the improvements will certainly take time to play out. This is the nature of dealmaking, which is complicated and involves lots of negotiation.

But going forward, investors may want to start taking a look at opportunities in the private equity space. The good news is that many of these firms are already public, like Carlyle, KKR (NYSE:KKR[5]) and Blackstone Group (NYSE:BX[6]). Oh, and they all sport decent dividends yields, which range from 1.6% to 3.6%.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[7], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[8] and “All About Commodities.”[9] Follow him on Twitter at @ttaulli[10]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. Wall Street Journal: http://online.wsj.com/article/SB10000872396390444433504577649740591806800.html?mod=WSJ_hp_LEFTWhatsNewsCollection
  2. junk bonds: http://investorplace.com/2012/09/how-much-higher-can-junk-bonds-go/
  3. CG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CG
  4. launch of QE3: http://investorplace.com/2012/09/5-things-qe3-wont-fix/
  5. KKR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KKR
  6. BX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BX
  7. IPOPlaybook: http://investorplace.com/ipo-playbook/
  8. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  9. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  10. @ttaulli: https://twitter.com/ttaulli

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