Peter Martenson featured in Law360 piece “PE Buyers With Expertise Can Still Lock Down Bargains” by Tom Zanki

Law360, New York (August 13, 2015, 1:03 PM ET) — As soaring valuations entice private equity firms to cash in investments — pushing exits to record highs — experts say buyers with niche expertise can still find good deals in a seller’s market that’s demanding a more disciplined and selective approach.

Peter Martenson, partner at placement agent Eaton Partners, said circumstances favor buyers willing to chase hard-to-find deals and do the “dirty, dusty” work of adding operational value after the acquisition. He said specialists on certain sectors, especially beaten-down industries like oil and gas that have been hammered by plunging prices, can take advantage because their know-how distinguishes them from generalists.

“This is not a time for tourists,” Martenson said. “In terms of private capital, you need to be an expert who understands their space.”

Eaton was the placement agent for energy-focused private equity firm Ridgewood Energy Corp., which raised more than $1.9 billion to close its largest fund ever last month, one designed to capitalize oil exploration and production in the deep U.S. waters of the Gulf of Mexico. Ridgewood seeks to develop oil there for $20 a barrel or less, an approach the firm says enables it to thrive across various price environments.

Heavy industries in general, including jet engines, aerospace and shipping, can provide attractive targets for buyers who know what they’re doing, Martenson said. In June, AE Industrial Partners LLC, a private equity buyer targeting aerospace and power generation sectors, bought engineering services and technical staff provider Belcan Corp. for an undisclosed sum.

Murray Indick, a Morrison & Foerster LLP partner with extensive private equity industry experience, noted that while overall data indicates a seller’s market, driven by several multibillion-dollar deals, many small and midsize private equity shops with distinct niches are scouting buying opportunities.

“The days of just being a generalist leverage buyout private equity firm, especially for bulge bracket firms, are over,” Indick said. “An increasingly large number of private equity firms are laser-focused on a particular sector with deep financial and operating partners and expertise.”

The hunt for bargains comes while data show exits reaching record highs. Trade group Private Equity Growth Capital Council reported last month that exits exploded in the second quarter to $125 billion, an 80 percent jump from $70 billion in the first quarter. Early third-quarter activity has seen several more high-stakes exits, including Wednesday’s $9.1 billion sale of private equity-backed software company SunGard to Fidelity National Information Services Inc.

The exits follow years of rising valuations — a typical private equity holding period is about 5 1/2 years — aided by low interest-rate policies aimed at stimulating investment in equities. Broader stock values have rallied for about six years as the financial crisis recedes further into memory.

“On a multiple basis, valuations are surging to all-time highs, and there are a large number of eager and willing corporate buyers — you could understand why it might be an attractive time to take advantage,” Kirkland & Ellis LLP partner Sean Rodgers said.

Amid record sales, data also show that private equity buying is flattening in terms of dollar amounts. The Growth Capital Council report said new investment dipped 1 percent to $112 billion last quarter, though that is still the second-highest second-quarter level since 2007. Fundraising by private equity firms, which typically invest in companies with borrowed money and hope to sell later at a profit, also fell 21 percent, to $30 billion, down from $38 billion in the first quarter.

One sector that is busy raising funds is natural resources. Researcher Preqin said private equity natural resource funds have raised $28 billion through midyear, setting the pace for the highest full-year level on record, surpassing the previous high of $30 billion raised in 2013.

The trend coincides with a dip in commodity prices that began in mid-2014, led by plunging oil prices, which are down about 50 percent from their peak, creating opportunities for investors looking to seize undervalued assets. “

Our view on energy is now is the time to be thinking about how to prosecute [deals],” Martenson said, “because commodity prices are lower.”

Private equity firms can patiently search for deals knowing they are sitting on huge piles of cash. The Growth Capital Council report noted that callable capital reserves, or dry powder, of global buyout funds rose 8 percent to $467 billion in the second quarter. Private equity giants Apollo Global Management LLC, Blackstone Group LP, and The Carlyle Group LP are among the leading firms amassing huge war chests following several multibillion-dollar sales.

Martenson also expects private equity investors to bargain for opportunities in economically troubled regions, such as Mexico, Brazil, Puerto Rico, southern Europe — including debt-ridden Greece — and even powerhouse China, where once-robust growth has cooled and the government has taken drastic steps to contain a recent stock plunge.

Here in the U.S., Indick said auctions of high-quality businesses remain vigorous and well-attended. He expects that to continue while debt markets are robust.

“Buyers are still very much active and are likely to remain so while the leveraged loan markets are open, even with expanded EBITDA multiples,” Indick said.

Noting that the vast need for private capital remains, Rodgers expects talented private equity buyers to locate compelling opportunities on a case-by-case basis.

“Private equity investors will continue to innovate, find attractive assets and put private capital to work in ways that are attractive to investors,” Rodgers said.

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