Private equity firms, thrust into the public eye by the 1989 book and film adaptation of Barbarians at the Gate, are on heightened alert as hedge funds increasingly eye distressed debt in the secondary market, destabilising refinancing and sales processes.
A key driver, say bankers, is that private equity firms are being forced to hold on to assets -- their so-called "portfolio companies" -- for longer in tough trading times because of poor conditions for exiting investments via initial public offerings and trade sales.
Private equity did a mass of leveraged deals at bumper prices in the lead-up to the global crisis with debt due in five and six years, creating a wall of refinancings with fresh debt or debt extensions via "amend and extend" deals, and opportunities for hedge funds to gain cheap control of distressed assets. In 2006 and 2007, private equity made $US20 billion of acquisitions, according to Thomson Reuters, compared with $US10.5bn in the past two years.
CVC Asia Pacific's dramas with Nine Entertainment highlight the trend, with hedge funds, led by Apollo and Oaktree, moving on the debt offloaded in the secondary market by banks in the original lending syndicate. Other similar recent targets include Pacific Equity Partners' vacuum cleaner business Godfreys, and Alinta Energy.
On a panel at the Australian Private Equity and Venture Capital Association's annual conference last week, Quadrant Private Equity's Jonathon Pearce said buyout firms were more aware of hedge funds lurking for debt to get control through so-called "debt for equity" swaps.
He said once hedge funds got a material stake "it certainly does destabilise a process". "It's a disappointing outcome," he said, adding it had picked up in recent years.
Quadrant, one of Australia's mid-tier private equity firms, recently bought into Super A-Mart and Barbeques Galore in a deal that averted a refinancing for part-owner Ironbridge Capital.
While not all hedge funds have a long-term view and look to "loan to own", Mr Pearce said the tactic showed some "arrogance" and was often harder than it appeared.
Deutsche Bank director Alok Jhingan said the investment bank increasingly had seen hedge funds looking to acquire debt in lending syndicates because of Australia's relatively attractive economy and as exit options dried up for private equity firms.
Private equity firms aim to buy companies, improve them and sell for substantial times their money in three to five years. The interest of hedge funds comes as several foreign banks look to sell debt positions and return to their home markets, providing an opening for canny investors to strike.
Westpac head of leveraged finance and acquisitions Greg Clark said the bank seldom on-sold debt positions as there was often better money to be made by being "a bit more patient". He added the banks were "doing a little bit of talking" about whether it was best to sell debt positions in the secondary market or hang on and work through the situation.
"We're more likely to sell if we're in a large syndicate with a small hold, so our ability to influence the negotiation or the outcome is low," he said. "The most fundamental thing is, we are more likely to sell or not depending on our faith in the management and the sponsor team."
Mr Clark added Westpac was buying out other banks' debt positions in better performing assets before refinancing to get to know new clients and as a way "to step up and take a little bit more".
Commonwealth Bank head of acquisition finance and advisory Phil McCabe added, "refinancing is a fantastic entry point opportunity", and CBA was actively pitching to private equity firms about refinancing deals on better terms.
Mr Clark said more private equity executives were also feeling out their options ahead of potential refinancings. The volume of leveraged loans in the past 12 months has doubled to $10.5bn -- $5bn of which has been refinancings, which Mr Clark said showed the market was coping well.
While hedge funds -- at times labelled "bottom feeders" -- use various strategies, more distressed debt players increasingly will look to the Australian market for opportunities to gain control of companies via debt for equity swaps, Minter Ellison partner Michael Hughes said. He said most wanted to do solvent transactions, a process helped by the general recognition on how "value destructive" the voluntaryadministrator can be.
Writen by Global Administrator, 14/03/2016 News