The number of unsold portfolio companies of private equity firms at the end of 2012 touched an all time high according to data published by market research firm PitchBook Data. The research firm which has been tracking this data since 2004 estimates that some 6,500 portfolio companies representing approximately 70 percent of total private equity assets was unsold as of the end of last year. Andrew Cristinzio, a partner within the deals practice unit of PricewaterhouseCoopers says this overhang in unsold assets is twice the levels normally seen in the years prior to the 2008 financial crisis.
Investors Take Note Of Glut In Unsold PE Backed Companies
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According to data provided by Preqin a firm which tracks alternative investments, of the $3.27 trillion in global private equity assets at Sept. 30, unrealized portfolio value accounted for $2.27 trillion. Such a sizable overhang of unsold portfolio companies has concerned large institutional investors.
The Los Angeles County Employees Retirement Association which has roughly $41billion in assets and the $38 billion Teachers Retirement System of the State of Illinois are among prominent private equity investors that are tying new capital allocation to portfolio company exits. These two retirement funds committed $150M each to the latest fund of PE firm Silver Lake Partners after closely tracking the private equity firm’s portfolio company exits. It is not clear how much these retirement funds invested in Silver Lake Partners’ prior rounds but the capital invested in the latest round is a tiny portion of their overall assets suggesting that these funds in all likelihood are either cutting back on their commitments to Silver Lake Partners or starting with a small investment.
For the record, Silver Lake Partners which invests in large cap technology companies through leveraged buyout and growth capital investments has a dismal record in selling companies that were acquired through capital raised from its last two rounds. Approximately 70 percent of the capital raised through Silver Lake’s second fund which closed in 2004, and 75 percent of the capital raised through its third fund which closed in 2007 are still locked in unsold portfolio companies. In all, Silver Lake had about $7.6 billion locked in 24 portfolio companies according to an internal staff memo of Los Angeles County Employees Retirement Association at its board meeting in February to decide on capital allocation.
PE Property Fundraising Lowest Since 2003
Another data point published by Preqin showed that private equity firms focused on investing in real estate had a hard time in the first quarter. Twenty private equity funds held final closing during the quarter and raised $5.2 billion, the lowest since the third quarter of 2003. The amount raised was 79 percent lower compared to the $25 billion raised in the fourth quarter of 2012. Funds that held final closings in the quarter had average marketing period of almost 19 months, more than double the time spent in 2007.
Private equity Rockpoint Group LLC closed a $1.95 billion fund dedicated to investing in distressed and value added properties in the US, UK and Japan. This was the biggest raise by a PE firm in the quarter. It was followed by New York based Prime Finance Partners which closed a $621 million US debt fund and Alabama based Harbert Management Corp which did a $326 million round for investing in properties in Europe. Approximately $3.7 billion representing three fourth of the capital raised during the quarter was for investing in properties in North America.
Despite the sharply lower numbers, Andrew Moylan, head of real assets products for Preqin says investor appetite for private real estate funds has increased in recent months and adds that there is a degree of momentum in the fundraising market citing the 44 interim closes in the quarter.
Chase For Higher Yield Drives Pension Funds To PE
Despite the recent lackluster performance of private equity funds, in its 2013 global private equity report Bain & Company points out that low bond yields and rising obligations to retirees are forcing pension funds, endowments and other limited partners to increase their capital allocation to private equity firms. The report shows that during the first quarter of 2013, US public pension funds increased their average allocation of private equity capital to 8.3 percent of their assets from 7.5 percent at the start of 2012. The increase was even larger among pension funds with assets over $5 billion. Private equity capital allocation among such funds increased to 9.7 percent of assets at the start of this year from 8.2 percent in the first quarter of last year.
Private Equity Firms Sold Aggressively In Q1
Amid a major stock market rally in the first quarter, private equity firms sold a record amount of stock in follow on offerings. According to data provided by Dealogic, PE firms sold $20.5 billion in shares during the first three months of the year, the most in a quarter. There were 50 follow on offerings during the quarter, twice as many in the first quarter of last year. The biggest deals of the quarter were the $1.8 billion sale in HCA Holdings by Bain Capital and Kohlberg Kravis Roberts, and the $1.5 billion sale by Apollo Global Management in LyondellBasell Industries.
It remains to be seen whether these aggressive PE sales indicate limited potential for further appreciation in stocks or whether these sales are meant to free up capital for more promising investments.
