Henry Kravis called it private equity’s golden age. From 2005 to 2007, buyout firms paid fat prices to buy about 20 supersized companies, from Hilton Worldwide Holdings Inc. to Hertz Global Holdings Inc.
Now, a decade later, the results of that debt-fueled spree can be tabulated -- and it’s hardly golden. The mega-deals produced mostly mediocre returns, falling well short of the profits that leveraged buyout shops typically seek, according to separate compilations by Bloomberg and asset manager Hamilton Lane Advisors. In more than half the deals -- each valued at more than $10 billion -- the firms would have been better off if they had put their investors’ money into a stock index fund.
Have the Masters of the Universe learned a lesson? They say they have. Caution is now a watchword and less is more. TPG Capital has entirely sworn off enormous deals, people with knowledge of its thinking said, while other shops will consider them only if the price is right. But so far none has led a $10 billion or bigger transaction since the financial crisis.
“The big deals were done more out of ego than economic sense,” said David Fann, chief executive officer of TorreyCove Capital Partners, which advises pension plans that invest in buyout funds. “People paid steep prices and put on too much debt.”
Representatives for Kravis’s KKR & Co. and TPG declined to comment.
Buying Frenzy
Private equity firms make money by charging investors -- pensions and other institutions -- an annual management fee equal to 1.5 percent to 2 percent of the funds they raise. They also keep 20 percent of any profits when a company they acquired is later sold.
The firms typically want to, at least, double investors’ money within three to five years. But a decade ago, a buying frenzy stoked by low borrowing costs saw firms pay sometimes twice as much for companies as dictated by traditional sales and cash flow multiples. That behavior almost guaranteed so-so returns, buyout executives now say.
Private equity firms led 19 purchases worth more than $10 billion from 2005 to 2007, according to data compiled by Bloomberg. As of Dec. 31, the deals earned the firms a median profit of 40 percent above their investment cost -- well below their goals.
Smaller Deals