Despite Shift in Market Conditions, Biggest Private Equity Firms Still Attracting Top Talent
Low interest rates and aggressive lending by banks and other lenders have fueled the current buyout boom. Nine of the largest ten private equity deals on record were completed since 2005, according to private equity investment advisory firm, Franklin Park Associates. Deal tracker, Dealogic, also reports that private equity deals accounted for about 34% of the $1 trillion in U.S. merger activity in the first half of the year. Now, after nearly two years of record deals, critics suggest that buyout firms are over-leveraging companies, raising concerns that some of the biggest deals will have a hard time securing financing. But as market conditions shift, some predict the strong will survive. And executive recruiting firm, A.E. Feldman, says as long as the strongest players remain in focus, private equity firms increase their ability to attract and retain top talent.
The number of active buyout firms in the world has climbed to 676, growing an impressive 55% over the past five years, according to London-based research house Private Equity Intelligence. Now, critics suggest that too many of these firms have taken on too much debt. LBO firms have taken advantage of liquid capital markets and a friendly lending environment to pay-up for companies and take dividends by recapping companies they already own. While this works in a good economy, there are concerns that if the capital market turn less liquid or if the economy slows down, companies will become strained given the high amount of leverage.
Going forward, some market watchers expect a decline in toggle deals and “covenant-lite deals” or deals which reduce the likelihood of an interim technical default. As a result, only the companies that are capable of putting up more equity will be able to pull off big deals. “Until now we were in a period where risk was underpriced,” said Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business and Chairman of Roubini Global Economics. “Debt was so cheap that anybody could take a semi-profitable company private and leverage it. Now the price of this is going to be more expensive.â€
Going public also gives private equity firms access to huge amounts of capital. Two firms, Blackstone and Oaktree, have recently had initial public offerings. Apollo, Carlyle, TPG and Kohlberg Kravis Roberts, one of the world’s largest private equity firms, have announced plans to do the same. In fact, considering the size of the Blackstone offering, as private equity firms make merger headlines they may also dominate the IPO market. And this could translate to even more private equity opportunities for qualified professionals. According to A.E. Feldman, the IPO trend just increases the ability of private equity firms to attract and retain the best talent.
