Videos

Tech ‘On Fire’ In Private Equity

Ron Kahn, Lincoln International managing director, discusses the state of the private equity market with Bloomberg’s Jason Kelly and Vonnie Quinn on “Bloomberg Markets.” (Source: Bloomberg)

Ron Kahn, Lincoln International
Image source: Bloomberg Video Screenshot

Tech Is ‘on Fire’ in Private Equity Market, Lincoln International’s Ron Kahn Says

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 hedge fund letters, conference, scoops etc

Transcript

Ron, define middle market private equity first.

We define middle market as companies that have EBITDA of less than 100 million dollars. There's all kinds of definitions. Probably the more classic one is 50 million of EBITDA but for the index purpose it was 100 billion. As it turns out the average EBITDA in the index is right around 30 million.

And so this index like gold to investors in a lot of ways because these companies are hard to value. You know unlike a public stock which we can go and look at any day of the week these are closely held companies are often owned by private equity firms. And yet your index if I'm really right shows that they're growing in value faster than some of their public counterparts where they are.

So we have the ability to get the financial information on fifteen hundred privately held companies most of which are owned by private equity firms because we have this incredible amount of information. We teamed up with professors at the University of Chicago Steve Kaplan who's probably one of the experts. Private equity Well you're right Mike Mike Mendus Professor of Accounting and they helped us create this index.

What are the valuations showing you both third growth obviously and the different sectors.

Well first of all private these companies are extremely well over the last five years that we started the index for Q1 2014 and since its inception. So it's five years old. The index is growing just about 10 percent as compared to the S&P which is about 6 percent. So almost 50 percent increase and returns from these private companies compared to their public company counterparts.

And so what's driving that value. Where is it coming from. You know to Varney's earlier question. Are there specific sectors that are doing better. What are the levers as it were that they're pulling to make these were valuable.

First of all the because the index defines it as enterprise. So we're able to look at both the multiple and the earned. Yeah interestingly it's the performance that's driving the growth more than the multiple which obviously a good thing. Talking about sectors, technology is just on fire. That has consistently done very very well. Industrials did pretty well until the fourth quarter that came down a little bit. Energy lags energy has been the laggard of the sector.

We'll get back to that in a second. I just mentioned this morning with the London Economist who said that he is slightly worried about private equity about bubble in private equity. He's not quite sure if it would impact other outhouses or other pools of money if something does actually happen. What are you seeing from your vantage point.

I think so far things look really well. Purchase multiples are on the higher side. I think our average purchase price multiple in the database is around 10 11 percent but it's not uncommon for companies for a 12 13 14 percent leverage is also pretty high with the average leverage for the portfolio companies were valuing is around 5 to 6 percent using a number of value seven seven times five to six times and sometimes going up to seven times so they are leverage but they are hanging in there that they're doing just fine.

So everything that you've said what sort of quest are we moving into more of a seller's market than a buyers market for private equity at this point. Do you get the sense that the sponsors that equity sponsors are wanting to get out of some of these fast creating assets.

I think we've been in a seller's market for probably the last two years yeah. Most private equity groups would like to sell their portfolio companies that's very high multiple. Now they also have cash to deploy and so they do to buy companies but a lot of times you'll see them do adults to be able to figure out a beta about a way to blend the multiple.

Where does it end though.

I mean it does feel like there's a lot of money a lot of new funds being set up to take you know maybe not the spectrum of industries but certain industries in it's going to and I think everybody's scratching their head and will say that lenders and private equity guys know that buy a company today there's a good chance that they're going to be holding a for years as a result is a very good chance they're going to be holding holding in a recession. So there are some companies like the TMT companies that are doing very well auto building products companies which know you know are problems and a downturn are going up at a much slower Mo.

What's the biggest worry you get from the companies sort of implicitly in the valuations we will see there what do you worry about in 19.

Looking at this data Well I think the thing that's interesting about some of this stuff is pro forma adjustments seems to be the norm when these companies report and what happens with public companies as well. So again we value 1300 portfolio but 75 percent have pro forma Osman's. Wow. Is that a trend. Yes.

Yes it has. This is the pro forma adjustments what do they typically agree.

Well sometimes they're there for valid things that they're going to shut down a factory. They're going to lay off people. Times have synergies that they're not too sure they're going to realize. But it helps just say the higher purchase prices.