A new buy­ing frenzy

Private eq­uity group’s price pushed up wildly at its list­ing

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE

THAT PRIVATE EQ­UITY TRANS­AC­TIONS are rapidly be­com­ing fash­ion­able on fi­nan­cial mar­kets has just been con­firmed when the Fortress group was listed in New York. Bro­kers say that it’s rem­i­nis­cent of the dot­com era, when even in­sub­stan­tial IT shares were pushed up to dizzy heights in the midst of a feed­ing frenzy.

The list­ing of Fortress – which, apart from the pur­suit of private eq­uity deals, is also a hedge funds man­ager – at­tracted wide at­ten­tion and in early trad­ing the price was pushed up to nearly dou­ble the is­sue price. What’s even more rem­i­nis­cent of the hec­tic dot­com era is that it made in­stant bil­lion­aires of the founders in the midst of a price:earn­ings ra­tio that went up to 60.

Fortress was founded in 1998 by three for­mer em­ploy­ees of the UBS bank group: Robert Kauff­man, Ran­dal Nar­done and Wesley Edens. The lat­ter’s shares at one stage traded at lev­els that gave them a value of more than US$2bn (R14,5bn). In 2002, two other top mar­ket play­ers – Michael Novo­gratz and Peter Briger – re­signed from Gold­man Sachs and joined Fortress. The group ini­tially fo­cused on prop­erty deals, which pro­duced ex­cep­tional prof­its due to the prop­erty boom. Fortress takes up to 3% for the man­age­ment of in­vest­ments and up to 20% of the profit above a cer­tain min­i­mum.

The ex­tent of the in­ter­est in its list­ing is shown by the fact that the ini­tial pub­lic of­fer was over­sub­scribed 27 times. Ex­pec­ta­tions are that, partly as a re­sult of the suc­cess of Fortress, this year will be char- ac­terised by other private eq­uity groups and hedge trusts ap­ply­ing to be listed.“It’s al­ways been the case that when­ever there’s a frenzy for a spe­cific as­set class the founders of com­pa­nies use the op­por­tu­nity to un­lock cash for them­selves by sell­ing shares to the pub­lic,” an ex­pe­ri­enced mar­ket com­men­ta­tor re­marked.

It’s also pre­dicted that a num­ber of large com­pa­nies are go­ing to dis­ap­pear from stock ex­changes due to the bil­lions that are avail­able for private eq­uity deals. Eq­uity Of­fice Prop­er­ties Trust in the US, with a mar­ket cap of $40bn (R290bn) is cur­rently a tar­get. If that suc­ceeds it will be the big­gest private eq­uity trans­ac­tion ever.

Pen­sion funds and other in­sti­tu­tional in­vestors don’t like it when such groups dis­ap­pear from the mar­ket, but for the large mar­kets it’s not re­ally a prob­lem. But in SA it is a prob­lem when shares such as Ed­con and Sho­prite are delisted, be­cause the JSE is rel­a­tively small. It’s ex­pected that private eq­uity deals will in­crease in SA. JSE pres­i­dent Rus­sell Loub­ser says that other coun­tries tend to fol­low the US (see re­port else­where on this page). That this is al­ready the case is shown by the fact that, for ex­am­ple, J Sains­bury, well-known Bri­tish re­tail chain, and Ger­many’s In­fi­neon, Europe’s sec­ond-largest man­u­fac­turer of com­puter chips, are now be­ing tar­geted by private eq­uity groups.

In Bri­tain, private eq­uity trans­ac­tions are gen­er­ally ac­cepted. How­ever, In­fi­neon, with a mar­ket cap of 8bn euro (around R76bn), will be the first big listed com­pany in Ger­many to dis­ap­pear from the stock ex­change. In­fi­neon’s top man­age­ment is hold­ing out against the of­fer, as are other Ger­man tar­gets, such as the MAN truck group and Linde, the in­ter­na­tional gas com­pany, which is the even­tual con­trol­ling share­holder of Afrox in SA.

In an ef­fort to ward off the takeover, In­fi­neon CEO Wolf­gang Ziebart has promised share­hold­ers (In­fi­neon is con­trolled by Siemens) that he’ll re­struc­ture the com­pany to pro­duce stead­ier prof­its. Chip man­u­fac­tur­ing is a very volatile in­dus­try.

Mean­while, the Ger­man au­thor­i­ties have again in­di­cated that they’re con­cerned about the pos­si­bil­ity of the so-called al­ter­na­tive in­vest­ment in­dus­try and specif­i­cally hedge funds – and now private eq­uity groups – caus­ing a fi­nan­cial cri­sis. That’s be­cause there’s so lit­tle con­trol over them. Ger­man Fi­nance Min­is­ter Peer Stein­brueck tabled those fears at the re­cent Group of Seven (G7) sum­mit in Essen, Ger­many. The meet­ing was at­tended by the min­is­ters of fi­nance of seven large in­dus­tri­alised coun­tries, as well as the heads of their cen­tral banks. It was de­cided that ev­ery mem­ber coun­try would in­ves­ti­gate how to limit the risks to the fi­nan­cial sys­tem.

In the US, Trea­sury Sec­re­tary Henry Paul­son and Fed­eral Re­serve chair­man Ben Ber­nanke took the lead in study­ing the vul­ner­a­bil­ity of the mar­kets due to the enor­mous growth in lever­ag­ing that private eq­uity trans­ac­tions and hedge funds cause. That fol­lowed the $6,6bn (R48bn) losses that the Amaranth Ad­vi­sors group suf­fered in Septem­ber af­ter mis­read­ing the mar­ket for nat­u­ral gas fu­tures.

Ber­nanke ac­cepts, as does the Ger­man min­is­ter, that just as the IT in­dus­try fi­nally ma­tured, the rush of private eq­uity deals and ex­ces­sive spec­u­la­tion by hedge funds will come to an end sooner or later. What they want to pre­vent is an in­ter­na­tional col­lapse that will cause ev­ery­one to suf­fer.

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