Private-equity executives have spent the past five years bemoaning the difficulty of investing profitably with stocks at elevated levels. Now, they're getting a taste of what they wished for -- and a whole new set of headaches.
Entertainment powerhouse Endeavor Group Holdings Inc., backed by Silver Lake, and Legoland owner Merlin Entertainments Ltd., a recent Blackstone Group Inc. bet, are among those that have been walloped. Revenue at both companies has declined dramatically as Hollywood productions, concerts and sporting events have been canceled and amusement parks are forced to close.
Meanwhile, upheaval in the credit markets and economic uncertainty have brought buyout volume, already sluggish before the virus, to a virtual standstill. With the IPO and merger markets all but shut down and valuations depressed, any hope of selling investments profitably is also out the window for now.
During back-to-back calls from their Hamptons beach houses, Lake Tahoe ski cabins and Florida vacation rentals, private-equity managers have worked frantically to group their investments, with some using color-coded buckets. Green companies have escaped largely unscathed. Yellow means "Keep an eye on this one." Red equals serious trouble.
Junior analysts have been tasked with modeling 30, 60 and 90 days of little to no revenue at companies in the firms' portfolios. They have had to make unknowable assumptions about how quickly consumers will take vacations again, go back to the gym or visit movie theaters.
Firms have told their most-affected portfolio companies to draw down their revolving lines of credit and instructed them to find ways to free up cash, like waiting longer to pay suppliers, negotiating with landlords, furloughing or laying off employees and putting capital investments on hold.
So far, private equity isn't getting much help from the government. Federal regulations consider all the companies controlled by a single investor to be one entity, preventing most buyout-fund holdings from falling under the 500-employee threshold for small-business loans in the roughly $2 trillion stimulus bill.
Even if that rule were relaxed, as private-equity industry groups have urged, it wouldn't help the biggest firms, whose companies are almost all too large to qualify.
Private-equity backed companies may be eligible for the Federal Reserve's Main Street Lending program, but restrictions on borrowers' leverage, executive compensation and payments to shareholders could prevent them from taking advantage of it.
Defensive measures have bought a runway that will last until fall at Endeavor, which owns Hollywood's largest talent agency, UFC and the Miss Universe pageant. The company, led by well-known agent Ari Emanuel, had already pulled a planned initial public offering after public-market debuts by others soured.
Silver Lake is prepared to step in with more cash, if needed, to protect its roughly $2 billion investment in the company, the person said.
Merlin, which went private last year in a $6 billion buyout, will likely need more capital if its theme parks remain closed through peak season this summer, according to a person familiar with the matter. Blackstone, which bought the company through its fund that holds assets for longer than is typical in private equity, still has around 20% of the cash for that vehicle left over to support existing investments, the person said.
Among the buyout firms that are notably exposed is TPG, whose portfolio includes circus producer Cirque du Soleil Entertainment Group and fitness-center owner Life Time Inc. as well as talent-agency Creative Artists Agency LLC.
The virus has also taken a toll on health care companies including hospital-staffing firm Envision Healthcare Corp., which KKR & Co. acquired in a $5.5 billion buyout in 2018. Envision has said it had a steep drop in revenue as non-coronavirus patients forego elective procedures and avoid emergency rooms. Prices on its bonds due in 2026 tumbled by nearly 65% to below 20 cents on the dollar from the beginning of March to the beginning of April, according to MarketAxess. That's a level normally seen in companies in danger of bankruptcy.
Envision is now asking bondholders to take a haircut of about 50% to help ease its debt load, according to a person familiar with the matter. That has pushed up prices on its bonds to around 31 cents on the dollar.
Working to the industry's advantage is a record-high mountain of unspent cash -- around $2 trillion across global private markets, with most of that dedicated to private equity, according to investment-advisory firm Hamilton Lane Inc. Blackstone could be among the best positioned to capitalize on market disruption: It has yet to spend a dollar of the record $26 billion private-equity fund it raised last year.
While that money has been committed, it hasn't been drawn, leaving open the possibility that financially stressed institutional investors won't pony up when a private-equity fund calls. But that didn't happen in the financial crisis and firms say they aren't worried about it now.
Buyout investors are hoping the next year or two will bring a better environment for deal making than they have seen in some time. Firms such as Apollo Global Management Inc. that were able to quickly invest large sums of money in the aftermath of the financial crisis posted high returns and leapt ahead of rivals consumed with tending to battered portfolios.
In the past few weeks, bankers and lawyers have been inundated with questions from private-equity firms eager to snap up distressed debt and provide lifelines for cash-strapped companies. On an April 2 call with investors, Apollo said it had put $10 billion to work across credit and private equity over the previous month and is raising an additional pool of capital for its strategy that capitalizes on market dislocation, according to a person familiar with the matter.
Airbnb Inc. recently said that Silver Lake and Sixth Street Partners would together invest $1 billion in a combination of debt and equity to help support the home-sharing platform, which is reeling from a wave of virus-related cancellations.
Buyout firms have submitted proposals to invest in cruise lines, casinos, airlines and other hard-hit sectors of the economy, but corporate chiefs have so far been hesitant to accept financing under their onerous terms, according to people familiar with the discussions.