Broadening the playing field

Kirk Radke on euro stability and how private equity houses are motivating global competition


The world listens when Kirk Radke shares insights on key trends and developments within the private equity industry. The New York-based partner at Kirkland & Ellis can boast 27 years of solid experience as one of the globe’s leading lawyers for corporate and private equity work. He has advised and acted on behalf of clients in all types of complex business transactions, and is renowned as one of the go-to people for intricate private equity deals.

Radke believes PE houses remain one of the most influential drivers of competitiveness within the global economy. The industry expert’s opinion is that as PE firms act increasingly as equity investors, mezzanine or senior lenders, they help broaden the playing field. “This leads private equity houses to a more dominant position in motivating competition by advancing the efficacy of their portfolio companies,” Radke says. “Also, capital markets potency has contributed to the groundwork for this movement, and the significant confidence held by the majority of private equity houses has continued to boost new deal activity.”

US movement
Overall, the PE industry in the US in all types of transactions has been healthier since the middle of last year and included IPOs, purchases of companies, refinancing and selling of portfolio companies. The US is still an industry leader, as the top three funds, KKR, Carlyle and Blackstone, are all US-based.

According to Radke all of the above assists the US market to maintain a principal position globally, with around $28.5bn of capital going into private equity, compared to $9.9bn in Asia and $7.7bn in Europe. It seems also that some of the large buyout shops, including KKR and TPG, are now entering the real estate market. Radke sees this as a natural development: “It is simple. Those players believe there are prospects in that asset class and they have the confidence to hire people and exploit those opportunities. I am not surprised, real estate is an area with significant potential and these participants can see something worth taking further.”

Euro stability and recovery remain at the forefront of market concerns and have been a worry for a number of months globally. Curiously, this has not affected US deal opportunities as those can still be found and financed, Radke believes. To date the US has not seen a negative impact in the way private equity houses raise financings. People have so far not sat on the sideline, but keep pursuing and simply absorbing the questions and concerns of euro stability. “When you are able to formulate investments in times of uncertainty, they tend to have the highest returns. But perhaps this is a good question to ask again in a couple of months,” Radke states.

Flowing exit activity
A further trend over the past few quarters has shown a surge in exit activity. Values for exits are at all-time highs as fund managers take advantage of present market circumstances to exit investments that were entered post-financial crisis and during the buyout boom-period. “Quite often deals were pre-crisis purchased, say between 2006 and 2007, and as the majority span over three to five years, a large proportion is at a point that requires a push towards an exit,” Radke says.

A record 309 PE-backed exits worth a staggering $120bn were reported in the second quarter of 2011. They take up the biggest share of fund manager activity despite deal flow having bounced back from the lows observed throughout 2009. “As more capital is gradually returned to investors, the rise in exit activity may ease the thorny fundraising conditions, especially because the money goes straight into new funds to keep existing allotment levels,” Radke notes.

Radke also believes that the exits observed were predominantly US-based with only a few occurring in Europe. This is not a surprising market development, he says: “They are a continuing trend that began in late 2009 and has continued all the way until now. We can even say that they reflect the force and health of the portfolio companies.”

The high amount of cash generated from exits in Q2 2011 is certainly encouraging confidence in the PE asset class. Radke has no doubts about PE-backed exits. “They have really shown their resilience amid the financial turmoil and have supplied new buyers with buoyancy and confidence. Having watched their performance persistently improve, although it is never guaranteed, they provide a great deal of confidence to the future outlook of the industry and help to fuel transactions,” he says.

An additional factor driving this movement is what has emerged as increased confidence of private equity firms to invest in good businesses. Radke believes there are signs of a strong credit market in the US. “The trend cannot be denied, and all signs indicate that it is expected to continue. I believe the issue within the US will be mostly on the side of the seller. This is because as portfolio companies continue to perform well, private equity companies will look to sell their investments.”

PE industry trend
Despite encouraging forecasts and positive movements, the state of the PE industry has so far seen a difficult first half. A bulk of the PE fundraising environment is still showing a drop and extensions to fundraising periods. However, it is improving, Radke says: “We have reached the conclusion that PE as an asset class has demonstrated its worth by living up to its promise in times of turmoil. Within that we have seen a value-added corporate governance that affixes worth to investors and can employ a significant amount of capital to add a positive response to good PE houses. There has been great market reaction with favourable middle-market funds also receiving good feedback. PE houses are not dependent upon their size as smaller firms proved in their performance that they deliver just the same way a mid-market fund can.”

Radke believes that PE houses will either emerge as winners or losers in the near future. The outcome will depend on whether the houses have shown they can add value to their portfolio companies. “Once it may not have been as important, but today investors are looking for value that is added to the real economy. Although it is a little early to say which houses will prevail as winners, the trends seen within fundraising results will speak for themselves. It is likely that we will see indicators of how it is going to shape up in about half a year, while this time next year all of the firms will have come through, and we will have absolute clarity on the successes,” Radke says.

As to whether the larger buyout shops are pushing out smaller investors, Radke notes: “I don’t believe this is happening. Private equity fundraising affects all sizes even though it is much easier for partners with increased capital to deploy those funds, as opposed to those with smaller firms. It is true that larger firms position generously proportioned amounts of capital, but overall the fundraising market will reward good PE houses of any size as long as they have superior models in place.”

The latest trend within the industry indicates that financing is readily available for new PE-backed deals. Radke feels that most houses do not anticipate the number of new buyouts to decrease over the next few months because they are not struggling with the funding of new deals. There are specific sectors that have stood out because they triggered some of the largest deals in the previous quarter. “The outlook is positive overall for the industry but some areas stood out.”

Hot sectors
The Kirkland partner points to a few specific areas that appear to be hot temporarily. Healthcare has materialised as one of the stand-out sectors as it accounted for three of the largest deals in the previous quarter with PE firms demonstrating a growing interest. In addition, Radke observed a higher proportion of technology transactions, he says. Two of the largest deals in the second quarter included Lawson Software’s $2bn buyout by Golden Gate Capital and the announcement by Providence Equity Partners of its acquisition of SRA International for $1.9bn. “The market has noted a higher proportion of technology transactions and healthcare deals, and both seem to represent areas of growth. The disposition of private equity investors concerning technology-centred acquisitions stays optimistic thanks to abundant cash balances, strategic goals and low-cost debt. However, it remains clear that clients have been looking for good investment opportunities in all areas of growth over the past year.”

Meanwhile, PE warrants that optimum corporate governance practices are employed on behalf of clients. This looks particularly relevant with emerging markets, and is paramount for improving the economic position for possible shareholders and regulators internationally. Radke notes that many PE houses have shown an increasingly global investment outlook. He believes risks come hand-in-hand with growth in economies around the world. “Challenges include currency exchange concerns as well as regional and country-specific security and stability issues. In spite of those tests the private equity corporate governance model supports shareholders, management and directors to defy those trials,” Radke says.