Private equity investors with significant exposure to funds raised in 2006 and 2007 could find returns bleeding after seeing top buyout firms slashing valuations of companies in their portfolios 40% to 67% of cost.
During that period, investors committed $500 billion in new funds, far exceeding the annual industry average of $10 billion to $20 billion, according to a London-based private equity data collection firm. This double whammy for institutional investors already reeling from the declining stock market is also adding to problems for private equity money managers, who now foresee owning their portfolio companies for at least an additional two years.
Just last month, a public fund of buyout firm Kohlberg Kravis Roberts & Co announced a string of write-downs amounting to about 25%. Blackstone Group LP likewise announced losses in their pools of portfolio companies. And industry insiders say those big New York firms are not alone. Valuations of most portfolio companies, especially those acquired in 2006 and 2007, are falling to sometimes half of their cost.
NYPPEX sees more write-downs coming in 2008 for certain large-market LBO funds, said Laurence G. Allen, managing member of Greenwich, Conn.-based NYPPEX LLC, which sponsors a private stock exchange. We expect LBO funds to write-down many large-market private companies acquired in 2006 and 2007.
Indeed, Blackstone's $366.9 million drop in total earnings in the fourth quarter of 2007 was largely due to a slower growth of underlying portfolio company investments. Sixty-nine percent of the decline in its private equity revenue for 2007 came from reducing the value by $122.2 million of portfolio company Financial Guaranty Insurance Co.
Credit markets have gone from bad to worse, said Tony James, president and chief operating officer of the Blackstone Group in a conference call on March 10. "We're looking to 2009 before we see much of an improvement, he said.
Orlando Bravo, managing partner of San Francisco midmarket buyout firm Thoma Bravo agrees.
There's no question we are going through a tough economic period, Mr. Bravo said. The world has changed from the end of the second quarter 2007. Today it's a dramatically different environment. While Thoma Bravo has not had any significant write-downs in its portfolio, valuations are down, acknowledged Mr. Bravo, whose firm, formerly called Thoma Cressey Bravo, invests in deals in the $100 million to $200 million range.