Private equity executives appear to have short memories.
Some of the largest private equity deals — $1 billion-plus — completed so far this year have valuations, leverage and deal terms similar to those in place before the financial meltdown, industry observers say.
“It's 2007 all over again,” said Stephen Lewis, managing director at Previsio Partners LLC, a New York advisory firm specializing in asset-based, cross-border lending. “Deal volume is starting to creep up. Leverage multiples are creeping up with senior leverage five to six times” earnings before interest, tax, depreciation and amortization.
High amounts of leverage and loose deal terms have been blamed by some observers as adding to the credit bubble and causing private equity portfolio company distress and failures, lowering private equity returns.
“In 2007, your grandma could have done a leveraged buyout,” with loans from “too-big-to-fail banks” without covenants, said David Bonderman, founding partner at TPG Capital speaking at the Milken Global Conference, held April 23-26 in Beverly Hills, Calif.
The terms of the large deals this year include what's known as covenant-lite — loans with fewer restrictions on collateral, payment terms and level of income — and leverage recapitalizations, in which portfolio companies take on a lot more debt to pay shareholder dividends, repurchase shares or pay off private equity firms.
A recent example was megabuyout firm Kohlberg Kravis & Roberts' January buyout of Pets at Home, a British retail pet supply chain, for the higher-than-expected price of £955 million ($1.5 billion), including £350 million in senior debt. The transaction was heavily leveraged, amounting to five times Pets at Home's EBITDA of £70 million in the year ended March 31, 2009, and was covenant-lite, Mr. Lewis said.