A new buying frenzy
Private equity group’s price pushed up wildly at its listing
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.