Coronavirus hits LBO funds’ global performance

After a decade of strong and improving performance, leveraged buyouts (LBO) returns are starting to deteriorate as Covid-19 crisis advances.

In the first two quarters of 2020, LBO funds around the world delivered an average multiple of 1.36x on invested capital, a decrease from 1.45x recorded in late 2019, returning to levels last seen in 2014, according to data from research group eFront.

Despite the performance’s “significant drop”, eFront highlights “this is not a crash”, as it contrasts with “exceptionally favorable conditions” seen last year.

The decline in half-year returns was also accompanied by a jump in risk, reflecting the turbulent market conditions. Active LBO funds’ risk rose to 1.36x in the first quarter from 1.31x in Q4 2019.

At the second quarter this year, however, risk began to fall again, to 1.35x, eFront’s Quarterly Private Equity Performance report shows, after analysing over 4,000 funds across geographies, strategies, sizes and vintage years.

Meanwhile, the number of years required to generate liquidity globally has slightly fallen to at around 2.7 years, from the 2.75 years seen throughout the entire 2019.

As exit and deal environments have proved to be challenging, “managers have thus reduced their activity to focus on the management of companies in their portfolios,” the report noted. “Active LBO funds appear to have been in ‘wait and see’ mode during the first semester of the current year.”

Globally, private equity-backed M&A activity totaled $345.4bn so far this year, a 6% decrease compared to last year, Refinitiv’s latest M&A report recently revealed. By number of deals, global leveraged buyouts are up 8% compared to a year ago.

Fund managers have been cautious about valuations since the pandemic started and the industry will only get a sense of the necessary adjustments by the turn of the year, when NAVs will be systematically audited, Cyril Demaria, a private markets expert at the France-based EDHEC Business School, recently told Private Equity News.

Over the fourth quarter he expects non-distressed owners to be on the prowl for acquisitions and continue to build “moats” around their assets, which prop up valuations and might reduce the incentive to operate LBOs, Demaria said.

Particularly in the US, the pandemic economy is spurring fund managers to turn from tried-and-true leveraged buyouts to venture and growth strategies, a new survey by advisory services firm BDO USA has found.

Only 24.5% of respondents say they are employing leveraged buyouts, a decrease from a similar BDO survey of private equity and venture fund managers conducted last December, when 31% said they were employing buyouts.

Source: Private Equity News

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