Private equity may be on cusp of ‘golden age’

Private equity may be on cusp of ‘golden age’
NEW YORK, Sept 23 — The near collapse of the global financial system, which wiped out trillions in corporate value and personal savings, may be giving way to a new “golden age” for private equity investment, Silver Lake Co-CEO Glenn Hutchins said in an interview today.

Private equity firms suffered badly when debt markets seized up as a result of the crisis and banks did not want to lend increasingly scarce capital. Only just recently have credit markets started to unfreeze.

“The financial markets may be on the cusp of a new ‘golden age’ for private equity,” Hutchins, who is also a co-founder of the firm, told Reuters on the sidelines of the International Economic Alliance Symposium.

Hutchins, the co-founder of the US$13 billion private investment firm, cautioned that while there has been a significant stock market rally, the economy is showing stable, though not robust, growth.

“This recent stock market rally is a little troubling because it seems to me not to be supported by underlying economic fundamentals,” Hutchins said.

“But that aside, we have gotten down to levels that are pretty attractive and the banks seem to be recovering enough to provide modest levels of financing, which is all we need. We feel pretty optimistic,” he added.

The major concern, he said, is how long will investors have to be prepared to withstand low levels of economic activity.

‘ATTRACTIVE’ RISK PREMIUMS

But for the moment, Hutchins said, investors are once again finding risk premiums at attractive levels versus the low premiums before the asset bubble burst in December 2008.

“Now that the sort of panic of ‘08 is over and capital markets seem to be returning to some degree of normality ... companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.

But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.

The average investment grade corporate bond now yields 232 basis points over US Treasuries, down from the all-time high of 656 basis points on Dec. 5, 2008. By comparison, in May 2007, before the credit crisis started, spreads narrowed to 92 basis points, according to the Merrill Lynch indexes.

“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.

Silver Lake makes only a few acquisitions a year and is more inclined to use financing for working capital rather than purchases, Hutchins said.

“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said.

The firm, along with other investors, agreed to a deal earlier this month to pay US$1.9 billion to buy a 65 per cent stake in online telephony unit Skype from Internet auction and services company eBay Inc.

Ebay agreed to sell the stake in Skype for US$1.9 billion to a consortium including Netscape founder Marc Andreessen’s Andreessen Horowitz, venture firm Index Ventures, Silver Lake, and the Canada Pension Plan Investment Board.

Asked what he thought about the Skype sale and lawsuits filed by Skype’s founders, Hutchins responded: “No comment.” — Reuters