Business Of Buyouts Sees Signs Of Rebound

Better-than-expected earnings from Blackstone Group LP and a successful public offering from a Kohlberg Kravis Roberts & Co.-owned company Thursday were some of the most encouraging signs from the private-equity business in more than two years.

But much trouble still looms, mainly in the form of the hundreds of billions of dollars of debt strapped to big acquisitions during the credit boom.

Blackstone posted stable results Thursday with improved performance in its private-equity funds. That followed solid numbers Wednesday from Fortress Investment Group LLC, the New York-based private-investment firm. Those came as KKR and Silver Lake Partners raised $650 million from an initial public offering of Avago Technologies Ltd., the first sizable IPO of a buyout-backed company this year.

On a conference call, Blackstone Chief Executive Stephen Schwarzman said that two-thirds of the companies in Blackstone’s private-equity portfolio expected to see either positive or flat earnings before interest, taxes, depreciation and amortization, or Ebitda, in 2009 versus the previous year. That is compared with 35% of the companies in Standard & Poor’s 500-stock index, according to Blackstone. That, Mr. Schwarzman said, is ‘one of those things that makes private equity so special,’ he said.

But Ebitda results don’t account for interest expense on debt, and those payments are suffocating some large buyout-owned companies. Several of them are locked in negotiations with lenders to restructure their overleveraged balance sheets. Private-equity firms spent roughly $1.6 trillion on leveraged buyouts struck from 2005 to 2007, and these firms are now using a variety of measures, such as exchange offers and debt repurchases, to stave off default.

Energy Future Holdings Corp., formerly known as TXU Corp., is negotiating with lenders to ease its $44 billon debt burden by extending maturities on its bank loans. KKR and TPG acquired the utility in 2007 for $44 billion. Clear Channel Communications, owned by Thomas H. Lee Partners and Bain Capital, also is trying to restructure its $21 billion debtload. And NewPage Corp., a struggling paper maker owned by Cerberus Capital Management LP, plans to launch a bid to reduce its debt.

With the improvement in the debt markets, ‘there’s an opportunity to delever companies on attractive terms,’ said Blackstone President Tony James on Thursday. ‘You can effectively rewrite history by changing a company’s capital structure and reducing its leverage and purchase price.’

Private-equity firms also are taking advantage of buoyant equity markets. Avago, originally part of Hewlett-Packard Co., was purchased by KKR and Silver Lake in early 2005 for about $2.7 billion. The stock rose to $16.18, up 7.9%, on its first day of trading on the Nasdaq Stock Market, valuing the company at $3.9 billion. KKR will earn additional fees on the deal, as its nascent capital-markets unit serves as an underwriter on the IPO.

Large institutional investors such as pension funds and endowments remain cash-strapped after sustaining broad losses in the financial markets. That is increasing the pressure on the buyout firms, who are desperate to show clients they can return invested capital at a profit.

In the meantime, firms with uninvested capital are exploiting opportunities to buy assets from cash-strapped investors. On Thursday, for example, Fortress acquired a condominium project in New York from developer Kent Swig for less than $100 million through a foreclosure auction. In 2005, Mr. Swig paid $418 million for the building.

Peter Lattman

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