🍋 Private Equity Portability

Private equity's new financial engineering strategy, plus Uber to buy Expedia?

Author

Short Squeez
October 18, 2024

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“You don’t run a business hoping you don’t have a recession.” — Jamie Dimon

Good Morning and Happy Friday! Amazon AWS CEO is encouraging employees who don’t want to come back to the office to quit flat-out. Uber has discussed a bid for Expedia. Blackstone topped profit estimates and hit record assets under management. Netflix beat subscriber estimates, and McKinsey thinks banks’ profit rebound might be short-lived when rates fall. 

Plus, the 14 biggest take-private PE acquisitions so far this year in tech, and HigherDOSE is changing the way New Yorkers do self-care.

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SQUEEZ OF THE DAY

Private Equity Portability

The past couple of years haven’t been ideal for private equity investors. With soaring interest rates and market volatility, the number of great deals has dwindled.

But private equity firms still need to exit investments, and they’re getting creative with debt portability.

Portability allows private equity firms to sell a portfolio company without triggering a mandatory debt refinancing, which would typically require the new buyer to pay off or renegotiate existing loans.

While this gives private equity an edge in a tight M&A market, it’s frustrating for investment banks that were counting on fees from refinancing.

In two of Europe’s largest leveraged finance deals: the buyouts of drugmaker Stada and utility company Techem, banks were expecting to underwrite nearly €9 billion in financing but will end up with much less due to these portability clauses.

The portability clauses protect private equity firms if a deal falls through, allowing them to avoid potential maturity issues, but banks are left holding out hope for a bigger pipeline of work down the road.

Takeaway: Even when deals are few and far between, private equity is still holding the upper hand. Private equity and investment banking need each other, and investors have to tread lightly to make sure they’re not burning any bridges. But sponsors remain the masters of financial engineering, squeezing banks for every last dollar to boost their IRRs.

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HEADLINES

Top Reads

  • Amazon AWS CEO: Quit if you don't want to return to office (YF)

  • Uber discussed a bid for travel booking company Expedia (CNBC)

  • Netflix beats subscriber estimates as ad tier grows (Axios)

  • Blackstone tops profit estimates, assets hit record high (YF)

  • HigherDOSE is changing the way New Yorkers do self-care (NYP)

  • McKinsey warns banks of fleeting profit rebound as interest income decreases (YF)

  • The 14 biggest take-private PE acquisitions so far this year in tech (TC)

  • Apollo sees $75 trillion gap in private credit’s next frontier (YF)

  • Blackstone plans to list some of its largest investments (FT)

  • The new burnout generation (Vox)

  • New U.S. merger rules would weigh heavily on private equity (WSJ)

  • Consumers ramped up spending in September (Axios)

  • Google CEO names new search and ads boss (CNBC)

CAPITAL PULSE

Markets Rundown

Markets finish mostly higher: U.S. stock markets ended the day mixed on Thursday, with the Dow Jones posting modest gains while the S&P 500 and Nasdaq remained flat. The market reaction followed strong U.S. retail sales data for September, which outpaced expectations.

Meanwhile, Treasury yields continued their upward climb, with the 10-year Treasury yield rising to 4.1%, approaching monthly highs. The combination of solid economic data and slightly elevated inflation in recent reports has contributed to the rise in yields in recent weeks.

The U.S. consumer remains resilient: Retail sales data for September showed strength in consumer spending, with a 0.4% month-over-month increase, beating forecasts of 0.3%. When excluding auto sales, retail sales rose 0.5%, significantly above expectations of 0.1%.

Additionally, the Philadelphia Fed index, a key gauge of regional business conditions, jumped to 10.3, well above the forecast of 3.0. These indicators suggest that the U.S. economy remains on a strong growth trajectory, and the Fed's GDP-Now forecast shows 3.2% annualized growth for the third quarter.

With the Fed expected to continue rate cuts and the economy still on track for a soft landing, the outlook for financial markets remains positive.

Third-quarter earnings deliver so far: About 13% of S&P 500 companies have reported earnings for Q3 2024, with 75% beating expectations, which aligns with historical averages. Financial services and consumer discretionary sectors have shown the largest upside surprises, reflected in their strong stock performance.

Expectations for 2024 earnings growth remain around 9%, with 2025 earnings projected to grow by 15%. Lower interest rates in 2025 are expected to further support consumption and economic activity, potentially driving double-digit earnings growth next year.

Movers & Shakers

  • (+) Taiwan Semiconductor ($TSM) +10% after posting a 54% gain in net profit.

  • (+) Blackstone ($BX) +6% because the private equity firm posted strong earnings; record AUM.

  • (–) Lucid Group ($LCID) -18% after announcing a public offering to raise $1.67 billion.

Private Dealmaking

  • Permira completed its Squarespace acquisition after upping bid to $7.2 billion 

  • American Industrial Partners bought the coatings business of PPG for $550 million

  • X-energy, a small modular reactors developer, raised $500 million

  • Cyera bought Trail Security for $162 million

  • Oshi Health, a gastrointestinal clinic network, raised $60 million

  • Equilibrium Energy, a batter systems operator, raised $39 million

For more PE, VC & M&A deals, subscribe to our Buysiders newsletter.

NEIGHBORHOOD WATCH

Real Estate Digest

The 30-year fixed-rate mortgage increased for the third week in a row. Higher rates generally reflect the strength in the economy that is supportive of the housing market. But notably, as compared to a year ago, rates are more than one percentage point lower. Buyers are best served shopping around for the best mortgage product as rates vary widely between mortgage institutions.

Latest News

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BOOK OF THE DAY

Trust

Even through the roar and effervescence of the 1920s, everyone in New York has heard of Benjamin and Helen Rask. He is a legendary Wall Street tycoon; she is the daughter of eccentric aristocrats.

Together, they have risen to the very top of a world of seemingly endless wealth—all as a decade of excess and speculation draws to an end. But at what cost have they acquired their immense fortune?

This is the mystery at the center of Bonds, a successful 1937 novel that all of New York seems to have read. Yet there are other versions of this tale of privilege and deceit.

Hernan Diaz’s TRUST elegantly puts these competing narratives into conversation with one another—and in tension with the perspective of one woman bent on disentangling fact from fiction. The result is a novel that spans over a century and becomes more exhilarating with each new revelation.

At once an immersive story and a brilliant literary puzzle, TRUST engages the reader in a quest for the truth while confronting the deceptions that often live at the heart of personal relationships, the reality-warping force of capital, and the ease with which power can manipulate facts.

"A genre-bending, time-skipping story about New York City’s elite in the roaring ’20s and Great Depression."

DAILY VISUAL

‘Tis Pumpkin Szn

Source: Axios

WHAT ELSE TO READ

The Best PE, VC & M&A Newsletter

Buysiders is our deals newsletter to bring y’all the best insights on deals around Wall Street.

Every month, you get insider details on the month’s top 3 deals. For this month’s edition, we cover the following deals:

  1. Pepsi acquires Siete Foods for $1.2 billion

  2. Rio Tinto acquires Arcadium Lithium for $6.7 billion

  3. TPG Rise and GIC acquire Techem for €6.7 billion

Read the full edition here and subscribe to the newsletter below.

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DAILY ACUMEN

HIIT

High-intensity interval training (HIIT) is not only a game-changer for physical fitness but also for brain health.

A recent study from the University of Birmingham reveals that older adults who engaged in HIIT workouts for just six months showed improved memory performance and preserved brain volume, with benefits lasting up to five years.

The research highlights three key mechanisms behind HIIT’s brain-boosting power: improved cardiovascular fitness, reduced inflammation, and enhanced brain cell function.

While it’s unclear if different forms of HIIT will yield the same results, this study offers compelling evidence that short, intense bursts of exercise can have long-lasting effects on both body and mind.

So whether you’re on a treadmill or cycling, HIIT might just be the key to keeping your brain sharp as you age.

ENLIGHTENMENT

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MEME-A-PALOOZA

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