Weekend Economists Hit the New Year (and it hits back) Goodbye 2013 / Hello 2014!

[Demeter]

63. Buyout kings seek U.S. partnerships as deal prices rise

NOT A GOOD TREND...

http://www.reuters.com/article/2013/12/31/us-privateequity-partners-idUSBRE9BU0ER20131231

Private equity firms are increasingly seeking to partner with U.S. companies rather than buying them outright, as they struggle to find ways to put their huge piles of money to work at a time when frothy markets have made takeovers expensive. Major U.S. buyout shops, such as Blackstone Group LP (BX.N) and Carlyle Group LP (CG.O), are looking at deals such as minority investments in companies or partnerships with companies looking to make an acquisition -- types of transactions that they largely shunned before the financial crisis of 2008. Carlyle, for example, did no such deals in Carlyle Partners IV, a $7.8 billion U.S. buyout fund raised in 2005. But it ended up investing about 15 percent of its $13.7 billion Carlyle Partners V fund, raised in 2007, in such non-conventional deals. It sees potentially even more such deals for the U.S. fund it raised this year, the $13 billion Carlyle Partners VI fund. In September, for example, it agreed to invest $500 million for a minority stake in Beats Electronics LLC, the headphones company co-founded by rapper Dr. Dre.

"You clearly need to do more of those deals to get your targeted rate of return," said Peter Clare, co-head of Carlyle's U.S. buyout group, who noted that the share of non-conventional deals could top 15 percent in its latest fund.

Private equity executives argue non-conventional deals can be more lucrative when full-blown buyouts are expensive. Competition for them is less, as the transactions are custom-made and often do not involve auctions.

"Once we have an investment in a company we will do everything we can to help them achieve their goals, whether it is investing more money or not," Clare said.

While such non-conventional investments account for a small minority of private equity deals, they underscore the industry's desire to avoid the debt-fueled excesses of the 2005-2008 buyout boom in today's environment, in which cheap financing and high equity prices favor selling companies rather than buying. Private equity firms took advantage of red-hot capital markets to cash out on investments throughout the year, an approach epitomized by Apollo Global Management LLC (APO.N) co-founder and Chief Executive Leon Black in April with the phrase: "We are selling everything that is not nailed down."

Deploying capital has been more challenging. Although private equity-backed deal volumes are up 31 percent year-on-year in the United States in 2013 thanks to megadeals such as Dell inc and H.J. Heinz Co, the number of deals went down from 1,917 in 2012 to 1,715 in 2013, according to Thomson Reuters data. At the heart of private equity's predicament is a problem of plenty. The industry ended the year with $585 billion of "dry powder" to spend in North America, the highest since 2009, according to market research firm Preqin, thanks to yield-hungry investors, such as pension funds and insurance firms, piling in amid record-low interest rates. At the same time, these firms have struggled to find enough buyout opportunities to invest in to make the 20 percent annual return they like to promise to the investors in their funds, who are known as limited partners (LPs).

20% IS UNREALISTIC AT BEST, RAPING AND PILLAGING AT WORST. THERE ISN'T ANYTHING THAT CAN GIVE 20% ROI..UNLESS IT'S GREEN ENERGY.

SPECIFIC DEALS AT LINK