April 1, 2023

DealBook: More Money Than They Know What to Do With

From left, Henry Kravis of Kohlberg Kravis Roberts, Stephen Schwarzman of the Blackstone Group and David Rubenstein of the Carlyle Group.Shannon Stapleton/Reuters, Mark Lennihan/Associated Press and Fred Prouser/ReutersFrom left, Henry Kravis of Kohlberg Kravis Roberts, Stephen Schwarzman of the Blackstone Group and David Rubenstein of the Carlyle Group.

It is a $1 trillion game: Use It or Lose It.

The private equity world is sitting on that 13-figure sum. It’s what the industry calls dry powder. If they don’t spend their cash pile snapping up acquisitions soon, they may have to return it to their investors.

Nearly $200 million from funds raised in 2007 and 2008 alone needs to be spent in the next 12 months or it must be given back.

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Private equity executives, after spending the last several years largely on the sidelines amid the economic uncertainty — often proclaiming “patience” as an explanation — have begun to be anxious that they may need to go on a shopping spree. At least two major private equity firms, according to two executives involved in the discussions, have held internal strategy sessions in recent weeks about how to approach the looming deadline.

Some private equity firms have put the word out to Wall Street banks that they want to go “elephant hunting” — seeking big deals worth as much as $10 billion — and are willing to pay a special bounty for bringing them acquisition targets.

At least one firm has gone so far as to begin contemplating asking its investors, which include the nation’s largest pension funds, to extend the deadline for the money to be spent in return for certain concessions on fees. (Of course, they don’t return the fees that have been collected thus far).

“The clock is ticking loudly for these funds,” Hugh MacArthur, the head of Bain Company’s private equity practice, wrote as the lead author of a report on the state of the industry.

So the race is on.

But, of course, there is a problem: “Burning off the aging dry powder will likely result in too much capital chasing too few deals throughout 2012,” according to Mr. MacArthur.

That means it is possible we could see a series of bad deals with even worse returns.

Already, private equity firms have been quietly spending lots of cash. In the third quarter alone, private equity firms in the United States burned through $45 billion, up from $17.1 billion in the previous quarter, according to Capital IQ, which tracks deals data. Carlyle Group, which had its initial public offering earlier in May, has been the busiest firm this year: it has done 11 deals worth almost $12 billion.

Acquisition prices are also likely to balloon because of “lots of firms bidding for the same obvious deals,” Alastair Gibbons, a senior partner at Bridgepoint Capital, told Triago, a fund-raising services firm that publishes a widely read quarterly newsletter. “Since there is near record dry powder globally, it’s entirely plausible that we’ll see increasingly overcrowded bidding processes.”

Richard Peterson, an analyst for SP Capital IQ’s Global Markets Intelligence group, said that private equity firms are already paying multiples of Ebitda — earnings before interest, taxes, depreciation and amortization — of 10.6 this year, up from 10.3 last year. It’s worth remembering that many of the most successful deals in the private equity industry were bought for six to eight times Ebitda, he said.

He noted, however, that since firms were able to borrow at unheard-of low rates today “it may give them more confidence to pay a little bit more.”

Perhaps in a sign of desperation, many private equity firms have been increasingly engaged in a game of “hot potato” with one firm selling a business to another — known as a secondary deal. Mr. Peterson said that at the current pace, the industry was expected to spend a record-breaking $22.3 billion this year simply buying companies from each other rather than buying businesses from the public markets or from private owners outside the private equity industry.

Mr. Peterson also raised a question that is often being whispered about but rarely said aloud: “A lot of these firms are publicly traded now. So to what degree are the transactions being driven by earnings objectives?”

Many of the big private equity firms — Apollo Group, Kohlberg Kravis Roberts, Blackstone Group and Carlyle Group, among them — are public. And for the first time, it is possible that the interests of the public shareholders could diverge from the interests of the investors in the buyout funds, at least in the short term.

If the private equity firms don’t spend the money that they have already raised, it is unlikely they will be able to raise even more in coming years. And increasingly, the private equity firms have become dependent on the management fees not just to keep the lights on but to expand their businesses into other areas, in part to diversify, which has been part of the pitch to public investors. The biggest firms have become asset gatherers.

“In a nutshell, 95 percent of funds would be affected and see a big drop in fee income based on not investing all of the committed capital,” according to Tim Friedman, director of North America for Preqin, which tracks private equity fund-raising and deals. He said that he did not expect firms to do deals simply “for the sake of it,” but he also cautioned that the firms were “under a lot of pressure.”

So keep an eye out for megadeal headlines — and whether they command the same prices when the companies are sold.

Article source: http://dealbook.nytimes.com/2012/10/01/more-money-than-they-know-what-to-do-with/?partner=rss&emc=rss

Advertising: Uncertainty on Wall Street, Big Deals on Madison Avenue

To be sure, numerous agencies have succumbed to business woes. But no holding company that owns agencies has gone bankrupt. No agency with offices around the world has been forced to close, nor has any big agency in a large market like New York. And agencies are still making deals, actively pursuing mergers and acquisitions.

This summer, for instance, holding companies like Havas, the Publicis Groupe and WPP have announced deals for agencies like Big Fuel, DPZ, Host and Lunchbox.

And on Thursday, Publicis said that it would buy Schwartz Communications, a public relations agency with offices in Boston, London, San Francisco and Stockholm. It was the sixth acquisition of a public relations agency by Publicis in 18 months, according to The Holmes Report, a trade publication.

Another example of the trend will come on Friday, when MDC Partners, which owns agencies like Crispin Porter Bogusky and Kirshenbaum Bond Senecal Partners, is to announce the acquisition of majority stakes in two specialty agencies.

One agency, Concentric Pharma Advertising, creates campaigns for pharmaceutical marketers like Bayer, Novartis, Pfizer and Roche. Concentric has 75 employees who work at a headquarters in New York and an office in London.


The other agency, Laird Partners, is based in New York and also has about 75 employees. It specializes in ads for beauty, fashion and luxury-goods marketers like DKNY, Gap, Tommy Hilfiger and Calvin Klein.

MDC is estimated to be paying $20 million for the majority ownership stakes in both agencies, with additional considerations based on future performance.

The acquisitions are the second and third this year for MDC, which is based in Toronto and owns all or part of about 50 agencies. The previous deal in 2011 involved a New York agency named Anomaly. MDC made 13 acquisitions last year and two in 2009.

“When others are fearful, we are ambitious, and when others are ambitious, we are fearful,” said Miles S. Nadal, chairman and chief executive at MDC. “We see this time of uncertainty as a great opportunity.”

Although “the European debt crisis is a big issue because it’s affecting the confidence of C.E.O.’s everywhere,” Mr. Nadal acknowledged, “business for us has been terrific,” with a 24 percent increase in the first half in organic growth — revenue minus acquisitions and currency exchange — compared with the same period last year.

“We do not see any change in our clients’ patterns of behavior” in recent weeks, Mr. Nadal said. “The spending continues.”

That has encouraged him to pursue a “much more aggressive” acquisition strategy, he added, zeroing in on agencies in the fast-growing realms of digital marketing, social media and analytics; agencies in Asia, Europe and Latin America; and specialty agencies like Concentric and Laird.

Concentric was appealing, Mr. Nadal said, because health care “is obviously a critical area” in marketing. And Laird was appealing, he added, because “fashion, like music, is at the epicenter of pop culture.”

MDC and Concentric came to know each other in the last 18 months after Concentric began working on assignments with MDC agencies like Allison Partners, Attention Partners and Kirshenbaum Bond Senecal.

“It solidified our belief that MDC was the right partner for us to help accelerate our growth and the growth of our clients’ brands,” said Ken Begasse Jr., who is co-chief executive at Concentric with Michael Sanzen.

“We’re already talking about establishing a satellite office on the West Coast,” he added.

Concentric, which was opened in 2003, had previously entertained offers, Mr. Begasse said, but he and Mr. Sanzen believed MDC’s “entrepreneurial bent” best matched theirs.

An agency “we were in talks with earlier ended up acquiring a different agency,” he added, which “was renamed two times and now no longer exists.” Trey Laird, chief executive and chief creative officer at Laird, which was opened in 2002, said that he, too, had “talked to lots of the different players” in Madison Avenue deal-making circles.

He found MDC attractive, he added, because “I never got the sense there was a corporate way of doing things that was enforced on you.”

Mr. Laird was introduced to Mr. Nadal through a mutual friend, Hamilton South, who sold a majority stake in his fashion-focused public relations agency, the HL Group, to MDC in 2007.

“It was nice to know someone who’d been through this whom I trusted,” Mr. Laird said.

Being part of MDC could help “take what we do to the next level,” he added, listing goals like expanding the digital division, adding offices overseas and “taking our expertise in fashion, luxury, beauty — high-image-driven brands — and applying it to other categories.”


Mr. Laird, like Mr. Nadal, said he had seen no signs of “dramatic shifts” in advertisers’ spending plans in response to the recent turmoil in American and European financial markets, which he described this way: “It’s up. It’s down. It’s recovered. It’s not.”

“Certainly, everyone is watching everything closely,” Mr. Laird said, but clients know that “going dark” — that is, to stop running ads — “is not going to do any good when it’s so competitive.”

“You have to get in the ring, and you have to duke it out,” he added.

Article source: http://feeds.nytimes.com/click.phdo?i=2b3d8534ac9953a9b54c6bddf8ae7223