Marathon Asset Management reposted this
Bringing out the Big Guns: The Fed is about to enter an easing cycle that will prove supportive for Private Equity. While PE sponsors do not hibernate like bears in the winter, sponsors have been quiet from an acquisition/exit standpoint since the past two years have proven difficult given equity valuations and higher financing costs (SOFR rose +525bps). Ditto for perspective homeowners who have bemoaned the fact that home prices/mortgage rates/operating costs make ownership less attainable. But relief is coming. Looking forward, I expect SOFR to gradually decline by 200bps in the next two years as the Fed eases and inflation normalizes. Other considerations will come into focus for LBO sponsors: 1) potential for higher corporate tax rates, 2) changes in supply chain cost structure derived from nearshoring and tariffs, 3) slower economic growth, 4) regulatory scrutiny from FTC and EU that impacts (e.g. technology, healthcare) and 4) valuations have risen to all-time highs. Despite this, PE is sitting on $1.2T of undrawn capital globally. $1.2T of dry equity powder with lower future financing rates as lenders are willing to provide a dollar of debt for every dollar of equity. During the past two years, PE has focused on value creation with add-on acquisitions, revenue growth, improving operating metrics, technology investment, CapEx, streamlining costs, improving margins all to minimize/offset higher interest charge. By and large, PE has performed admirably despite the higher interest rate regime, and slower deployment/exits. Going forward, I expect greater exits plus dividend recaps to return capital to LPs. The average LBO PE-multiple is 12x EBITDA with stapled financing of 6x debt-to-EBITDA. LBOs on the rise, the lull coming to an end, the big guns are out and ready for hunt.