Currently unable to finance the megabuyouts of the recent past, private equity firms are looking down market — executing buyouts of smaller companies and making more minority investments in large, distressed companies.
That promises to change the private equity landscape dramatically. Formerly heady returns are likely to fall to earth, and relationships with managers of portfolio companies may involve more give and take.
Financial sponsors have executed 631 buyouts so far this year, according to data from Dealogic, New York. That's just 40 fewer than in the same period last year, but the value of those deals was $78.1 billion, 65% less than last year.
With their coffers still overflowing — $160 billion more was raised by private equity firms in the first quarter, according to London-based Private Equity Intelligence — they need places to put the money. Increasingly, they are putting it into non-controlling stakes in public companies starved for capital.
In the year to April 9, financial sponsors made 245 minority investments totaling $12.1 billion, according to Dealogic. That compares with 204 such deals, worth $10.9 billion, in the same period last year.
Private investments in public equity have traditionally been the financing of choice for small companies unable to raise enough money in public offerings. They are becoming a more common tool for large companies. “It's an opportunity for private equity firms to put money to work when other alternatives are not available,” said Peter Gottsegen, New York-based managing partner at private equity firm CAI.
Washington Mutual Inc., the Seattle-based thrift whose subprime lending business brought it to the brink of insolvency, is the latest distressed company to tap private equity firms.
Earlier this month, WaMu closed an agreement with an investor group led by TPG to pump $7 billion into the company. The investors will purchase common stock, convertible preferred shares and warrants that when converted will result in the issuance of 891 million new WaMu common shares.
All in, the price per share will be approximately $7.85, or a discount of more than 30% to the company's share price on the day the deal was announced. TPG will reportedly have a stake of slightly more than 16% in the company.
Observers say the deal shows how much the market has changed since leverage-fueled private equity deals peaked last year. “WaMu is today's TXU deal. We'll see a lot more PIPE deals like that,” predicted Douglas A. Cifu, a partner in the New York office of Paul Weiss Rifkind, Wharton & Garrison LLP.
Other companies thrown similar lifelines include E*Trade Financial Corp., which received $2.5 billion from hedge fund Citadel Investment Group LLC in November. Citadel and other investors received 12.5% senior notes, 19.99% of the company's common stock and E*Trade's entire asset-backed securities portfolio, which had a book value of $3 billion. Citadel agreed to pay $800 million for the securities.