This content is from:Portfolio
Deutsche Bank Predicts New LBO Upcycle
Here we go again. Brace yourself for another leveraged buyout boom. Deutsche Bank lays out in detail why it believes we are “on the cusp of another LBO upcycle.”
Here we go again. Brace yourself for another buyout boom. In a 36-page report sent to clients earlier this week, Deutsche Bank laid out in detail why it believes we are “on the cusp of another LBO upcycle.” I’m not sure whether this is good or bad news.
If Deutsche Bank is right, it will mean M&A activity can help revive the sagging, sullen stock market. But, as we know from the late 1980s as well as from just a few years ago, these booms end ugly. Valuations are heavily marked down literally overnight. Would-be acquirers try to renege on agreed upon deals. Shareholders of likely target companies suddenly are saddled with big paper losses.
The biggest winners are usually the lawyers who argue whether or not some Materials Adverse Change really took place at the target or whether buyer’s remorse has stricken at the same time that valuations were suddenly marked down. But, why jump the gun before the fun has begun, right?
In any case, here is DB’s case for the next LBO upcycle: It starts with the fact there is currently $500 billion in uninvested private equity capital. If you factor in typical leverage used in these deals, this works out to $1.5 trillion in purchasing power. Meanwhile, credit markets are robust, equity valuations look attractive and corporate fundamentals strong, Deutsche Bank asserts in its report. “In our view, each driver of an LBO IRR [internal rate of return] is remarkably favorable at this time,” the report adds.
It cites: high available leverage, lower required equity; record low high yield interest rates; very high free cash flow yields; strong cash flows; potential sales growth in a baseline of economic recovery; a supportive environment for margin improvement; and room for multiple expansion. One caveat: “The size of the last LBO boom could prove difficult to repeat with capacity for mega LBOs likely lower.” This is actually good news.
So, who are the likely targets? Deutsche Bank singles out 50 companies. They all share similar general key attributes: positive FCF, low margin, low asset growth, cheap valuation. The bank came up with the list and criteria after analyzing 500 LBOs since 1986. It says a company must have positive free cash flow to support additional debt, for example. Stocks with net income margins below the industry group median provide a financial buyer with the opportunity to cut costs and raise profits, DB adds.
Finally, LBO firms must not require significant investment, it adds. Hence, the low asset growth. “Overall, these three filters produced a universe of solid LBO candidates,” it asserts. DB’s hit list of 50 M&A targets is rebalanced monthly. DB says it has seen 11 acquisitions and has significantly outperformed the S&P 500 since inception. Based on back-testing, it claims an investor buying the top 50 LBO candidates in the S&P 1500 based on its criteria generated 24 percent average annual returns since 1992, beating the S&P 500 by 15.6 percent and the Russell 2000 by 13.5 percent. Nice. In addition, the Sharpe ratio of the basket is higher than the S&P 500.
DB每月重新平衡投资组合。在当前的50股名单中，有许多熟悉的名字。它们包括出版巨头Gannett，零售商Kohl和Gap，Drug制造商森林实验室和国防巨头北葡萄球和雷神。50，目前在Deutsche Bank的购买名单上有五股股票：Apollo Group，为其凤凰城大学而闻名;保险巨头Cigna;阿拉斯加航空集团;硬盘制造商西部数字，与公用事业美国电力。我们将密切关注此列表，看DB是否已达到某种东西。
If Deutsche Bank is right, it will mean M&A activity can help revive the sagging, sullen stock market. But, as we know from the late 1980s as well as from just a few years ago, these booms end ugly. Valuations are heavily marked down literally overnight. Would-be acquirers try to renege on agreed upon deals. Shareholders of likely target companies suddenly are saddled with big paper losses.
The biggest winners are usually the lawyers who argue whether or not some Materials Adverse Change really took place at the target or whether buyer’s remorse has stricken at the same time that valuations were suddenly marked down. But, why jump the gun before the fun has begun, right?
In any case, here is DB’s case for the next LBO upcycle: It starts with the fact there is currently $500 billion in uninvested private equity capital. If you factor in typical leverage used in these deals, this works out to $1.5 trillion in purchasing power. Meanwhile, credit markets are robust, equity valuations look attractive and corporate fundamentals strong, Deutsche Bank asserts in its report. “In our view, each driver of an LBO IRR [internal rate of return] is remarkably favorable at this time,” the report adds.
It cites: high available leverage, lower required equity; record low high yield interest rates; very high free cash flow yields; strong cash flows; potential sales growth in a baseline of economic recovery; a supportive environment for margin improvement; and room for multiple expansion. One caveat: “The size of the last LBO boom could prove difficult to repeat with capacity for mega LBOs likely lower.” This is actually good news.
So, who are the likely targets? Deutsche Bank singles out 50 companies. They all share similar general key attributes: positive FCF, low margin, low asset growth, cheap valuation. The bank came up with the list and criteria after analyzing 500 LBOs since 1986. It says a company must have positive free cash flow to support additional debt, for example. Stocks with net income margins below the industry group median provide a financial buyer with the opportunity to cut costs and raise profits, DB adds.
Finally, LBO firms must not require significant investment, it adds. Hence, the low asset growth. “Overall, these three filters produced a universe of solid LBO candidates,” it asserts. DB’s hit list of 50 M&A targets is rebalanced monthly. DB says it has seen 11 acquisitions and has significantly outperformed the S&P 500 since inception. Based on back-testing, it claims an investor buying the top 50 LBO candidates in the S&P 1500 based on its criteria generated 24 percent average annual returns since 1992, beating the S&P 500 by 15.6 percent and the Russell 2000 by 13.5 percent. Nice. In addition, the Sharpe ratio of the basket is higher than the S&P 500.
DB每月重新平衡投资组合。在当前的50股名单中，有许多熟悉的名字。它们包括出版巨头Gannett，零售商Kohl和Gap，Drug制造商森林实验室和国防巨头北葡萄球和雷神。50，目前在Deutsche Bank的购买名单上有五股股票：Apollo Group，为其凤凰城大学而闻名;保险巨头Cigna;阿拉斯加航空集团;硬盘制造商西部数字，与公用事业美国电力。我们将密切关注此列表，看DB是否已达到某种东西。