Dividends and Private equity investors fret about managers overpaying for deals

At the end of February there was a conference in Berlin, Germany called the SuperReturn conference. The conference was aimed at the world’s largest private equity investors. According to an article by Joshua Franklin of Reuters, the investors were worried about the same thing same investors are worried about – overpaying for the company.

The average leveraged buyout cost about 11 times a company’s 12 month earnings before interest, taxes, depreciation and amortization. The number in 2009 was 8.6% according to Bain & Co.

Ideally the goal is earn an internal rate of return (IRR) of 20%, but Cambridge Associates notes the average IRR was less than 10% in 2015.

Private equity managers earn lucrative fees on investor capital, typically 1.5% management fee on the money committed and a 20% cut o the profits as a performance fee, subject to a returns threshold.

In a typical leverage buyout private equity firms juice up returns by loading up acquisitions with debt, which is provided by the banks. The firms are hoping for high rates of growth to drive returns.

Note close to 30% of deals by private equity firms lose at least some money.

Since 2012, the private equity industry has raised nearly $3 trillion from investors.

Linking to dividend paying stocks, if private investors take an increasing large position in the companies you own, they may be just trying to increase their fees so you should look for other alternatives and consider selling.

There are more questions than answers, till the next time – to raising questions.


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