Private-equity managers from Fortress Investment Group LLC to Blackstone Group LP, which made billions by buying low and selling high, say now is the time to exit investments as stocks rally and interest rates start to rise.
Fortress, the first publicly traded buyout firm in the U.S., is preparing holdings for public offerings while struggling to find attractive new deals, Wesley Edens, who runs Fortress’s $14.3 billion private-equity business, said on a conference call with investors yesterday. That environment extends to credit and distressed investments, said Pete Briger, who oversees the New York-based firm’s $12.5 billion credit business.
“This is a better time for selling our existing investments than making new investments,” Briger said on the call. “There’s been more uncertainty that’s been fed into the markets.”
Their comments echoed remarks from Apollo Global Management LLC Chief Executive Officer Leon Black to Blackstone President Tony James, who said last month the environment is ripe for selling because credit markets are still hot and equities strong. Three rounds of bond purchases by the Federal Reserve, coupled with improving earnings and economic growth, helped propel the Standard & Poor’s 500 Index up 152 percent from its bear-market low in 2009.
Speculation about the Fed’s monthly bond purchases has whipsawed stocks since May, when Chairman Ben S. Bernanke first indicated policy makers could begin reducing the stimulus this year if the job market continues to improve.
“It’s almost biblical: There is a time to reap and there’s a time to sow,” Apollo’s Black said at a conference in April. “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.”
Black’s New York-based firm, which oversees assets worth $114 billion, generated $14 billion in proceeds from the sale of holdings between the first quarter of 2012 and the first quarter this year.
The industry’s focus on exits has reduced volumes of leveraged buyouts (LBOs) this year, with the number of private-equity deals announced declining 20 percent to 3,047 worldwide from the same period last year, according to data compiled by Bloomberg.
“It’s a difficult environment to find really attractive things when the markets are robust as they are,” Fortress’s Edens said yesterday.
Global stocks have gained 11 percent this year, led by a 20 percent rally in the S&P 500, which rose above 1,700 for the first time yesterday.
The stock market rally helped push up average prices for LBOs to nine times earnings, Black said in April. A reasonable buyout price is less than eight times earnings before interest, taxes, depreciation, and amortization (EBITDA), according to consulting firm Bain & Co.
Blackstone, also based in New York, took advantage of the rising markets to sell shares in three companies—General Growth Properties Inc., Nielsen Holdings NV, and PBF Energy Inc.—and take three public, including SeaWorld Entertainment Inc., in the last quarter alone. The firm, run by CEO Steve Schwarzman and James, last month reported second-quarter economic net income of $703 million, more than triple its year-earlier profit.
“With credit markets hot and equities strong, this is a better time for selling assets than for buying,” James said on call with media on July 18. “Activity levels seem to be shifting from the U.S., which has been our focus over the last couple of years, to Europe, where there’s more distress, and Asia and emerging markets, where liquidity issues are arising.”
Blackstone is also lining up real estate investments for sales in the next two years. Among its holdings are global hotel chain Hilton Worldwide Inc. and office properties from its $39 billion purchase of Equity Office Properties Trust in 2007.
“There will continue to be a growing series of real estate realizations as we go forth over the next 12 to 18 months,” said James.
Fortress, which in 2007 became the first publicly traded private-equity and hedge-fund manager, yesterday said second-quarter pretax distributable earnings more than tripled to $148 million from a year earlier. The company sold remaining investments in its first buyout fund. The firm’s aggregate private-equity holdings grew to a value of 1.4 times invested capital.
“Within the five-year period between 2008 to today, we witnessed one of the best times to be a buyer to one of the best times to be a seller,” said David Fann, CEO of TorreyCove Capital Partners LLC, which advises buyout managers and investors.