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PE & VC News

In some respects, the American consumer is key to global economic growth.  This week we’ll get another reading on the state of retail in the U.S.  No doubt markets will respond feverishly.

The question here is related to the American consumer.  What do the 2016 Retail Sales figures for the U.S. portend for private equity-backed companies in the consumer products space?  Here’s a look at the connection between American Retail Sales and acquisitions of the aforementioned companies.

Acquisitions of Private Equity Backed Companies in the Consumer Products Space

Before going into the connection between the American consumer and acquisitions in the consumer products space, here’s a look at acquisitions of private equity backed companies in the consumer products space.

The acquisitions figures generally follow the business cycle.  The most recent measurement of 64 in 2014 is the all-time high, surpassing the previous high of 62 in 2008 (2015 figures have not been publicly released yet).  Overall, the current economic recovery has been just fine for the consumer products space, at least for consumer products companies backed by private equity companies.

Capture1

Retail Sales

Shifting to the American consumer, here’s a look at the monthly Retail Sales figures as reported by the Commerce Department. The recent measurements, although not recessionary, are not pretty.  The American consumer’s spending is only rising at about 2 percent per year, around what inflation is doing. This could suggest that potential acquirers of private equity-backed consumer products companies may be less inclined to pull the trigger in the current economic environment.

YY Retail Sales Source: U.S. Commerce Department


The Connection Between Retail Sales and Acquisition of Private Equity Backed Companies in the Consumer Products Space

With American consumer growth relatively weak, could 2016 turn out to be a weak year for acquisitions of private equity backed consumer products companies?  Here’s a look at the connection between the two.  Perhaps not completely surprising, the two appear closely connected.

Interestingly, it appears that private equity is behind the curve when it comes to predicting economic conditions.  Prior to the last economic recession, acquisitions of private equity-backed consumer products companies peaked in 2007, about two years after Retail Sales started to decelerate (and eventually turn negative in 2008 and 2009).  In evaluating the connection, the weak American consumer activity probably suggests acquisitions of private equity-backed companies in the consumer products space perhaps declined to 50 in 2015 and may decline to around 40 in 2016.  Real weak given the period of the American economic expansion.

Retail Sales and Acquisitions of Private Equity Backed Consumer Products Companies

Conclusion

This year could turn out to be an incredibly poor year for private equity investments in the consumer products space.  The most recently available public data from the National Venture Capital Association has 64 deals in 2014.  Using some econometrics, the figure probably declined to around 50 in 2015, and may decline further in 2016 to around 40.  Although not recession-weak, for an economic expansion entering almost a decade-long in length, the 2016 figure is quite weak.

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If you are involved in the connection between initial public offerings (IPOs) and the private equity business, you know that 2016 has been weak, real weak.

According to the private equity data provider Pitchbook, through the end of August the market has seen 42 private equity-backed IPOs. Is 42 private-equity backed IPOs weak?  Here’s a look at 2016 compared to the number of private equity-backed IPOs in the prior five years.

In 2011, there were 75 private equity-backed IPOs.  That declined slightly in 2012 to 69.  Private equity-backed IPOs jumped in 2013 to 116, followed by 169 in 2014 and then decelerating to 105 in 2015.

By comparison to the past 3 years particularly, the 42 private equity-backed IPOs year-to-date in 2016 does not bode well.  Weak, very weak.

The drop in IPOs valued at $1 billion or more and backed by private equity companies is perhaps even more astonishing.  In 2011 there were 25 such transactions.  The number stayed relatively weak in 2012 at 21.  In 2013, 2014, and 2015 the numbers jumped higher, expanding to 49, 64, and 33, respectively.

PE backed IPOs1 Source: Pitchbook

 

Private Sales are Looking More Attractive in 2016

Where have the deals gone?  Well, part of the answer is that 2016 is simply a relative dry year.  Some of the dryness stems from a weakening global economy and a relatively more risk-averse investor.

Of course, economic conditions only explain part of the so-far sour 2016.  Another movement is that owners and private equity investors are shifting to private sales.  Private sales have been offering some transparent advantages recently, including lowering debt levels and low interest rates.

For example, Thomas H Lee Partners had been considering a mid-August IPO for inVentiv Health, a pharmaceutical research company. With only two weeks before inVentiv Health was to go through with the IPO marketing, Thomas H Lee Partners decided instead to sell half of its stake in the company to Advent International.

Why?  Indications are that although the private sales valuation at $3.8 billion was less than what Thomas H Lee Partners might have gotten through an IPO, inVentiv’s leverage at around the 6x level was just too high for the deal to be done outside of a primary deal.

Because of this, all the proceeds would have gone to pay down debt to get leverage under the 4.5x level now typically needed to get stock investors on board, stopping Thomas H Lee Partners from extracting any cash until several months after the IPO. By selling half the business to Advent, Thomas H Lee Partners was able to immediately return capital to its partners and retain the high leverage in the business.

The purchaser, Advent, had no problem increasing debt commitments to back its equity investment.

Conclusion

Overall, private equity-backed IPOs in 2016 are quite weak.  Among the contributing factors are the weak economy and the relatively increasing attractiveness of private sales over public markets.

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If there’s any sector of the global economy that’s changed since the onset of the global financial crisis in 2008, it’s the financial industry.  The industry, often blamed as part of the root cause of the global malaise, has grown and shifted attention (sometimes) quite dramatically over the past eights years.

Of the many sectors within the financial industry, perhaps no sector has gone through such large shifts as the private equity industry.  In recent years, we’ve seen a flurry of activity of private equity companies into areas that traditionally have received little attention from the prestigious investment firms.  Here’s a look.

pe1 Source: Quandl, GraphIQ

Water

Suppose one warm summer afternoon you get thirsty, and decide to take a drink out of the faucet in your home.  Surprisingly, this water – traditionally provided by your local government – could be from a private equity company, such as is the case in Apple Valley.

Essentially, private equity firms are clever bargain hunters.  Money is made by buying businesses considered to be under-performing, then looking to maximize profits and eventually sell the business off at a profit.

Roads, Bridges, and Highways

Up until recently, private equity has traditionally stayed clear of services, instead opting for companies doing technology or operating in hard industry.  That’s shifted in recent years.  Now, in addition to the traditional sectors, private equity is looking for bargains in the service arena, including areas typically dominated by local governments.

Water delivery is one of many areas private equity is looking into.  Another is roads, bridges, and highways.

As an example, consider the Port of Miami tunnel in Florida.  The tunnel is designed to avoid downtown Miami.  Instead of bonding for the project through a potentially controversial bond issue, the State of Florida opted to hire Bouygues Civil Works to incur the upfront financing and building risks.  The State only pays once certain milestones are accomplished.

Prisons

It is, of course, not just water and transportation that’s getting attention from the private equity industry.  Such things as prisons are drawing interest.

Case in point is the Public-Private partnership pioneered in Virginia two decades ago.  The prison, costing $42 million to construct, was built more efficiently and less costly because of the State’s decision to use private money for a public project.

According to Virginia officials, the State saved 15 to 20 percent by using a public-private partnership as opposed to building the prison themselves.

Other Areas

The foray of private equity into traditionally public goods doesn’t stop at water, roads, highways, and prisons.  Private equity is moving into such things as parking garages, trains, and various other potentially profitable endeavors.

For instance, a very large private equity firm, Fortress Investment Group, is promising to build a rail line that can transport people from Miami to Orlando faster than anything currently available.  The line plans to operate 32 trains per day, making four stops each day.

Conclusion

A lot has happened over the past eight years.  In the financial world, one of the bigger shifts is the massive expansion of private equity into our daily lives.  From water, to toilet paper, to trains, to roads, and many other facets of our lives, private equity has begun to wedge itself into the equation.

The industry sees profit to be made from previously under-performing companies (or governments).  Whether that turns out to be the case is yet to be seen.

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Has Venture Capital in Europe Finally Arrived?

July 26, 2016

Part One of a Two Part Series It’s been almost six years now since Arif Naqvi’s Abraaj Group provided £4 million to fund the first Master’s program in private equity in the world. It was a bold endeavor. In September 2010, when the MSc Finance & Private Equity program was launched at the London School […]

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It’s Certainly Not Even Across the Financial Industry, but Financial Employment is Coming Back

July 12, 2016

Friday’s employment report out of the Bureau of Labor Statistics (BLS) showed a white-hot American labor market.  June’s employment growth jumped +287K, a gigantic jump from the +38K of the prior month. In looking at financial industry employment, the picture is certainly strengthening as well.  During June, financial industry employment gained 16,000; for the year […]

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Anyone Notice the Change in Venture Capital on Banks’ Balance Sheets?

June 27, 2016

The venture capital industry is connected with many edges of the global economy. One area that’s experienced a shift in venture capital’s importance is banking. Question: Would you guess that revenue from venture capital investments is growing or declining in relevance on banks’ balance sheets?  Here’s the look. Savings Institutions Savings institutions are entities that simply […]

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Which President Was the Best for Venture Capital?

June 14, 2016

It’s presidential election season.  What better time than now to ask which president since 1985 has seen the strongest venture capital performance during his administration? (Note: the choice of 1985 is based purely on availability of reliable data.  If further historical were readily available, it would have been included in this article.) Within this period are […]

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Can You Guess the Top 10 Venture Investors and Accelerators?

May 30, 2016

If there’s anything the venture capital and private equity world is for sure, it’s that at the sectors are competitive, uber competitive. Can you guess which entities come out as the most active?  Here’s a look. Accelerators First, a look at the top accelerators.  The first graph is a look at the top 10 accelerators since […]

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What Does the Recent IPO Weakness Mean for 2016 Bonus Pay?

May 16, 2016

Last year was a relatively rough year for IPOs.  According to Renaissance Capital, IPOs in 2015 were down over 30% from their 2014 level. The start of 2016 doesn’t appear to be offering any sort of relief anytime soon.  The IPO market is in a deep freeze. The question here is – what does the […]

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CEO Pay: Does the Financial Industry Win?

March 21, 2016

There is perhaps no more contentious issue that compensation.  The contentiousness becomes even more heated when discussing CEO pay. Question – which industry has the highest paid CEOs? Here’s a look at average CEO pay and CEO pay growth by industry according to recently released figures by Pitchbook. Before looking, which industry would you guess wins?  Finance?  […]

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