Blackstone: Buyout Business Is Overheated

Thanks Bill for the article. I sit here and wonder if the PE space is overheated the same way that the VC and Quant funds space was / is. This resulted through pension funds allocating a percentage of their funds to these asset classes because of past performance and now there is too much capital in these classes chasing the same deals and bidding them up amongst themselves.

Aivars Lode


Blackstone: Buyout Business Is Overheated
By GREGORY ZUCKERMAN
The buyout business, flat on its back two years ago, has rebounded so strongly that Blackstone Group LP has grown queasy about competing for deals against high-bidding rivals.
In comments eerily reminiscent of the late stages of the buyout boom that ended in 2007, Blackstone's President Hamilton "Tony" James pointed his finger at competitors during a conference call with journalists on Thursday.

Bloomberg News
'It has gotten pretty hard to find companies we like,' said Blackstone President Hamilton 'Tony' James, shown in September.
"We're routinely priced out of the market," Mr. James said. "We haven't been close" to the prices commanded in recent takeovers that some rivals have agreed to, he said. "It's gotten a lot harder to find things of attractive value; we just can't get to the prices required, partly driven by robust debt markets."
Whether intentional or not, Mr. James's remarks came just as Blackstone competitor Carlyle Group announced its second large deal in as many days, bringing the two-day total to $6.5 billion.
On Thursday, Carlyle agreed to buy technology- and business-solutions provider Syniverse Technologies Inc. for $2.6 billion, or $31 a share. On Wednesday, the buyout firm agreed to pay $3.9 billion to purchase telecom-equipment maker CommScope Inc.
In some ways, Syniverse and CommScope are aggressive deals for Carlyle. Both companies are growing rapidly, are leaders in their markets and have exposure in foreign markets. As such, it isn't clear what Carlyle can do to improve operations, something leveraged-buyout firms sometimes are able to do.
And the target companies' prices aren't cheap—CommScope's price is roughly 8.5 times this year's earnings before interest, taxes, depreciation and amortization, while Syniverse's price is 10 times, according to analyst estimates for this year.
For their part, Carlyle executives argue that the companies have impressive growth prospects and that Carlyle can help them expand globally.
While the number and size of buyouts are nowhere near what they were at their peak, a flood of money into high-yield, or junk, bonds and leveraged loans has jump-started the buyout business. The average yield in the junk-bond market is at its lowest level since October 2007, falling to 8.74% on Thursday. Declining yields on Treasurys have fueled the demand for corporate debt, in turn causing a sharp reduction in spreads that had ballooned during the financial crisis.
New junk-bond sales this year reached $218 billion through Oct. 21, already 31% more than for all of in 2009, according to data from Standard & Poor's Leveraged Commentary & Data. Leveraged-loan issuance, has already cleared $179 billion year to date, more than double the entire volume of $76 billion for 2009.
Examples of recent leveraged-buyout deals that LBO executives acknowledge as expensive include children's clothing store Gymboree by Bain Capital, which offered a premium of almost 60% over the children's clothing store's share price before reports of a possible deal emerged, and Carlyle's $3.8 billion deal for nutritional supplement maker NBTY, which came with a premium of more than 40% over the share price.
With investors so eager to buy the debt, even more expensive deals are likely, buyout pros say.
Blackstone on Thursday announced a 23% increase in third-quarter profit to $339.3 million, excluding costs tied to its 2007 IPO, driven mainly by a continued recovery in its real-estate funds. But taking into account such costs, it reported a third-quarter net loss of $44.4 million, or 12 cents a unit, compared with a year-earlier loss of $176.2 million.
However, its private-equity business—the foothold of the firm—paled in comparison. Revenue dropped to $214.9 million in the third quarter from $226.9 million a year earlier, hurt by a decrease in performance fees and allocations, though that was partially offset by appreciation of privately held investments and increases in the share prices of publicly held portfolio investments.
Mr. James in his comments after the report said that Blackstone likely will see better growth from its GSO hedge-fund unit than from buyouts over the next few years, even though it is about to close on a new $13.5 billion buyout fund.
That is partly because prices for companies in auctions have become more expensive, and Blackstone is choosing to stick with smaller deals in Asia, energy transactions, and purchases in which it has few competitors, Mr. James said.
Indeed, he said his firm has been outbid on various properties in recent weeks and that Blackstone is focusing on selling, not buying.
"It's a better market to exit than to buy, prices are pretty full," Mr. James said. "The current financing market is excellent, it's almost hard to believe...there's a feeding frenzy for yield," Mr. James said.
—Matt Wirz and Amy Or contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com