Tags: Blackstone, fee discipline, KKR, Private Equity, underwriting
Underwriting a stock or bond deal can be very difficult and work-intensive: you need to coordinate your t-shirts for the pitch, manage logistics ranging from prospectus writing to investor-lunch-sandwich-buying, and actually convince investors to buy whatever it is you’re selling. But it can also be very easy. The limit case of easy underwriting is:
- Your phone rings at noon on a Tuesday.
- You answer it.
- “Hi, it’s Company X. How’d you like us to write you a check for $100,000 in exchange for letting us put your name on the cover of a document?”
- “Sounds good,” you say.1
- “Great, there’s a diligence call at 4:15pm. We price at 4:30.”
I’ve always liked the purity of this business model: basically, someone writes you a check, and you deposit it,2 and that’s that; you never sully yourself by actually providing them any service. But what’s in it for the client: why write you a check for doing nothing?
The answer goes something like this:
- There are fixed-ish fees for underwriting services – 7% for IPOs, 3% for follow-on equity, 2-3% for high-yield, a sliding scale based on maturity for IG.
- If you want actual underwriting done – someone to write a prospectus, call investors, and market the deal – you gotta pay those fees.
- Unless you’re Facebook or something, you have to pay pretty much the full fees.
- But you don’t have to pay all of them to the bank or banks actually doing the underwriting.
- Generally you have to pay each active bank at least as much as you pay any other bank,3 but you can still hand over a decent chunk of the fees to lower-level passive bookrunners, co-lead managers, co-managers, and other fancy titles for “bank that receives check.”
- So you essentially have “free” soft money: you’re writing a $3mm check anyway for that $100mm deal, but you can allocate $1mm or so of it to anyone with a securities license.
- So you might as well hand that free money to banks who’ve been nice to you: banks who lend you money at below-market rates, say, or advisors who’ve done lots of free work on M&A ideas that have never happened.
Read more »
Tags: Asia, Carlyle, Cerberus, Private Equity
A couple of big private equity firms have made all the money they think they’re going to on a couple of Asian financial institutions. Read more »
Tags: Carlyle, dividend recaps, Petco, PIK toggles, Private Equity
I for one was heartened a few weeks ago by Petco’s PIK-toggle dividend recap debt deal at 8.5%, which I interpreted as a moderately bullish signal of economic confidence while also keeping an open mind to the possibility that it was simply a one-off indication of investor love for dogs. Dogs! Today the Journal provides additional similar data points and the recovery seems to go beyond the pet-supply sector:
Debt issued to fund private-equity dividends has topped $54 billion this year, after a flurry of deals earlier this month, according to Standard & Poor’s Capital IQ LCD data service. That is already higher than the record $40.5 billion reached in all of 2010, when credit markets reopened after the crisis.
Also some of these deals involve a risky type of debt known as “payment in kind toggle”—or PIK-toggle—bonds that give companies the choice to defer interest payments to investors. Instead, they could opt to add more debt to the balance sheet. The default rate for companies that sold PIK-toggle bonds was 13% from 2006 to 2010, twice the default rate for comparably rated companies that didn’t use the bonds, according to a study by Moody’s Investors Service.
If you use PIK-toggle-dividend-recap as a barometer of economic activity, and of course you do, then yes it is definitely creeping toward its highest, “2006″ setting. On the other hand another barometer isn’t. Equally enjoyable was the Journal’s companion piece on the bad news implied by dividend recaps: Read more »
Tags: LBOs, Private Equity, Warburg Pincus
If you’re trying to sell a company there are two basic but opposite approaches. In one, you approach the best buyer, negotiate exclusively, and generally do what you can to get them to put their best foot forward in exchange for not having the headache of a multi-round, winner’s-cursed, might-get-topped-by-a-penny auction. In the other, you just run the auction and hope for the winner to get cursed, at the risk that the best bidders won’t play, or won’t bid aggressively, because they’ve been here before and understand the dynamic. There’s no approach that is just a priori right; you have long heart-to-hearts with your banker and look at unilluminating comp sets and feel out your best-bet bidders and then sort of take a guess about what’s the right thing to do.
There is an asymmetry here, though: if you do the exclusive approach, you get lots and lots of sued, because think of all the people you could have asked to bid but didn’t (and scared away with breakup fees or whatever). If you do the auction approach, you’re less likely to get sued, because it’s harder to think of all the people who you did ask to bid but who refused because they didn’t want to be winner’s-cursed. The fact that negotiated deals still happen is a testament either to boards’ and bankers’ commitment to shareholder value, or to the fact that those negotiated deals really are as conflicted as plaintiffs’ lawyers say they are and the boards and bankers are pursuing their own selfish agendas.
Anyway LBOs are back: Read more »
Tags: Bain, KKR, Lawsuits, Private Equity
If you’re Blackstone or KKR, are you on balance pleased or not pleased that Bain Capital’s favorite son is running for president? On the one hand, millions more people now think that they know what “private equity” is – and that they don’t like it – than did a year ago, and that loosely coagulated hostility has led to attempts to ban carried interest and dividend recaps and management fee conversions and the Cayman Islands. On the other hand, when a lawsuit accuses the entire private equity industry of antitrust violations and rampant corruption, now you get headlines like “Equity Firms Like Bain Are Depicted as Colluding,” and so I guess KKR employees can tell the folks back home “we are not an equity firm like Bain.” If Bain is a metonymy for Everything Bad in your industry, you can’t help but look good by comparison. Goldman Sachs once played this role for another industry, or still does, but at least Goldman is genuinely evil;1 boring Bostonian Bain is a weird choice to be the poster boy for badness. Did you know that Cerberus – an “equity firm like Bain” – is named after an actual hell hound?2
Anyway! Today’s unflattering depiction of Bain & ilk comes from a long-running class action lawsuit accusing those firms of price-fixing on a series of club LBOs in the go-go five-years-agos; the theory is that every private equity firm was in a conspiracy not to bid up each other’s deals, and to split the profits. The court recently released a heavily redacted complaint in that case that claims to draw on PE firms’ internal emails basically saying “let’s collude to drive down prices on all these deals.”
Presumably the redacted bits all say “let’s do lots of crimes!” but the unredacted bits tell a … pretty unsurprising story. Private equity firms wanted to buy companies cheap. They did so in part by not getting into tooth-and-nail bidding wars over any individual target, either by just not bidding for the target or by trying to club up with other bidders to split the deal. When this worked and PE Firm A got a deal cheap because PE Firm B passed on it, Firm A was like “yaaaay” and Firm B was like “you totally owe us, man,” which I feel like is in exact equipoise between “evidence of criminal antitrust collusion” and “just a bluffy/jokey thing you say when your competitor lands a deal.” Read more »
Tags: Best Buy, LBOs, M&A, Private Equity, Richard Schulze
If you were Best Buy founder Richard Schulze, how much would you pay to acquire the shares of Best Buy that you don’t already own? $24 a share? $26? $30? Surely it’d get too expensive for you above $30 or so?*
Nope! The more expensive it is for him the more money he saves, or rather gets, because he is not offering to buy Best Buy, but to sell it. From the Journal:
In his letter to the board, Mr. Schulze said he would finance the transaction through a combination of investments from private-equity firms, his equity investment of approximately $1 billion, and debt. His adviser, Credit Suisse, is “highly confident” Mr. Schulze could arrange the necessary debt financing, according to his statement.
Because Mr. Schulze’s holding of 68.9 million shares would be worth at least $1.65 billion, his proposal indicates he would divest himself of some of his personal stake as part of a transaction.
I had trouble believing this – perhaps he rounds down unconventionally, or he meant he was kicking in an extra $1bn in cash for the equity check? – but it seems to be true. Schulze’s press release says that “he plans to finance the proposed acquisition through a combination of investments from the private equity firms, reinvestment of approximately $1 billion of his own equity, and debt financing,” which sure does sound like he’s kicking in some but not all of his shares. If so, the higher the price, the better of Schulze is: at $24, he can have his billion-dollar stake while cashing out $650mm, at $26 he gets $790mm, and at $30 he takes out over a billion dollars. He is perhaps more diluted in the new company at these levels – and/or the newco is more leveraged – but … um … that’s usually what happens when someone gives you money in exchange for stock, isn’t it? Read more »
Tags: Armand Lauzon, Blackstone Group, Private Equity, Private Equity At Work, Some call this "skin in the game"—I call it being an owner, Steve Schwarzman, Tony James
If you work in private equity the last few months have not been kind to you. Man, dog, and Newt have all been ganging up on the industry, and it has not been helped by faux pas from its most famous alumnus, publicity around job losses and dividend-recaps-into-bankruptcy, or a renewed carried-interest debate.
Not to fear, though: coming to the rescue today are a rag-tag bunch of saviors including a cheesy website, a serial private equity CEO who’s pretty sure he was never instructed to torch the place for insurance money, aaaaaaand Blackstone’s Tony James: Read more »