The calm before the exit

Many private equity firms are coming to the end of a five-year cycle, which began with the recession in 2008, and will be looking to release their assets


“I don’t really see anything surprising about the current boom in the US private equity industry,” says Kirk Radke, a New York-based partner of century-old global law firm Kirkland & Ellis, one of the world’s largest firms of attorneys specialising in advising clients in private equity.

“The tough trading conditions of the recession that has prevailed since 2008 have helped to reveal which corporations can survive a down cycle. There’s a feeling out there that ‘if corporations can survive the recession they can survive anything,’ and those corporations are the ones in which my clients are likely to want to invest.”

Generally, five years is about as long as PE firms feel comfortable holding their acquisitions for, and we’re not far from about five years since the start of the recession

Today, the US PE industry is awash not only with cash for making acquisitions but also with talented and driven people who are more than happy to put the long hours into building up a PE firm’s success that the industry requires.

“The private equity business is one where people work very, very hard,” Radke avers. “It’s not a profession for people who always like to keep their evenings and weekends free. But the very fact that so many highly able young graduates are eager to come into the profession – Kirkland & Ellis is active in spreading the word about the PE industry at business schools and other educational institutions – shows that the industry is seen as offering fascinating and demanding work, and also substantial rewards.”

Willing investment
Money is flowing into the PE business not only from new investors and from the war chests of a number of firms, but also from banks willing, despite the persistence of recessionary conditions in the US economy just as these persist in Europe, to back the hunches of PE gurus. Radke points out that an industry deal for $1bn would typically involve the PE firm contributing about $300m and banks lending the rest.

“For private equity to really succeed as an industry,” Radke says, “you need the corporations in which private capital is being invested to deliver a good performance, and you need a strong prevailing environment for dealing in. These two requirements are being met today in the US private equity market, and this helps to explain why the market is booming.”

The figures speak for themselves. During the first quarter of 2012, US PE firms either took public or sold 112 corporations, with these deals generating an estimated $21bn. This is the highest number of first quarter exits since 2007. Yet while Radke certainly ascribes the current boom partly to the positive impact of current trading conditions, he also attributes it to a more fundamental factor.

“Yes, PE firms want to build up their acquisitions into lean, potent and dynamic entities that will have maximum success in the vertical market or markets they’re trading in, but success in PE is about timing the exit correctly too. Generally, five years is about as long as PE firms feel comfortable holding their acquisitions for, and we’re not far from about five years since the start of the recession. So it’s not surprising that PE firms are looking to exit now on investments they have held for about as long as they want to hold them.”

Radke is reluctant to be drawn on what he regards as the most significant PE deals since the start of 2012. He says, “I don’t see any particular transaction as being a bellwether of what’s happening in our industry right now; I think it’s more important just to emphasise the point that the pace of private equity industry in the US right now is very strong.”

Nor is he keen to be drawn on commenting about the fact that some IPOs of PE firms have not raised as much capital as was originally hoped for. For example, the Carlyle Group, one of the early pioneers of the PE industry in the US, raised $671m from its IPO on May 3 2012, which was regarded as something of a disappointment in the industry, was certainly a great deal less than the $4bn raised in 2007 when the Blackstone Group, one of the first US PE firms to go public, floated. Radke says: “I think that more important than commenting on individual flotations is the point that several major PE firms are now trading publicly. This inevitably increases the profile of the PE industry in the business world generally and increases transparency and confidence.”

Globally, Kirkland & Ellis has about 1,500 lawyers globally working out of a total of ten offices – six in the US (Chicago, Los Angeles, New York, Palo Alto, San Francisco and Washington DC) and four outside, in Hong Kong, London, Munich and Shanghai. In New York alone, Kirkland & Ellis has around 150 attorneys specialising in the PE industry, and 500 altogether stateside practising in that field.

Authoritative perspective
Radke emphasises that his role and the role of Kirkland in general is that of adviser rather than dealmaker. Yet what is unquestionable is that Radke’s position as a partner with more than 26 years’ experience in the industry gives him a strong and authoritative perspective on an industry whose deal-makers are frequently too preoccupied with their current projects to be best placed to make more general, holistic, observations.

What about the regulatory climate of that industry? “I’d say there’s a greater understanding among regulators nowadays of the PE industry than there has been in the past. They know more about it than before, and they recognise that proper regulation of the industry is a major part of the regulatory climate. I also think that the PE industry itself is doing a better job. I think the industry is more transparent today and more responsible in terms of recognising its vital role in the US business scene.”

While the current booming state of the US PE industry itself offers significant opportunities for growth, there’s a general recognition with the industry worldwide that emerging markets can bring rich pickings to PE firms who invest not only money but also time and effort in developing a detailed knowledge of a country and its business environment and investment opportunities.

Radke emphasises Kirkland & Ellis’s global nature and its ability to help clients with all their overseas strategies – including emerging markets. “Yes, I do think emerging markets offer the private equity world exciting chances for investment growth. Especially in Latin America, the emerging middle-class, new levels of political and economic stability and new and forward-thinking governments in most countries in the region add up to a truly interesting business environment. I see Brazil as a particularly exciting country in this respect in view of the sheer size of its economy and the growth that the Brazilian economy is experiencing.”

Radke also, naturally enough, sees India and China as important to PE firms. In addition, less predictably, he notes the importance of Turkey and central and eastern Europe.

World Finance asked Kirk Radke whether he’d ever had an urge to take part in a PE deal as a principal rather than as an adviser. “No, I can’t say I’ve ever had a desire to be on the other side of the table. Being a principal in a PE transaction takes a very special kind of person and I feel that my own skills lie firmly in the advisory capacity. I’m proud of the role my colleagues and I play in helping our PE industry clients, who are extremely results-focused and are operating in a highly demanding and competitive industry. At heart our clients are, inevitably, taking a bottom-line, money-oriented approach; buying a corporation, working very hard to make it perform better at every level, and then in due course selling it at a profit. I like working with clients to solve what are often extremely difficult problems and I enjoy the bottom-line approach of the PE industry and working with clients who are pursuing that bottom-line attitude to their work and to business.”

Radke sees a definite benefit to society from the industry he advises. “PE organisations contribute significantly to the economy, not only by bringing major levels of liquidity to the corporate world but also, at a practical level, by streamlining the corporations they buy and making those organisations leaner, more effective at what they do, and more cost-efficient. Our own role as advisers to this fascinating, dynamic, intellectually challenging and exciting environment involves advising our PE clients comprehensively regarding all their legal needs.”

He adds: “This means really pulling up our sleeves, working long hours just as our clients do, and sparing no effort to bring our clients the expertise, insight and practical legal assistance and guidance they need to maximise their likelihood of achieving their most ambitious goals. High-quality PE firms add value in the boardroom and play a vital role in the growth of business prosperity.”