Cheap deals scarce in U.S. private equity market
By Mary Kelleher
NEW YORK, March 5 (Reuters) - U.S. banks have profited over
the years by injecting so-called venture capital into private,
start-up companies, but inexpensive deals are tough to find
right now and the market is less than robust, analysts said.
The surge in U.S. stock prices has created a flood of cash
and investors are scrambling to invest in burgeoning companies
that could become the next Amazon.com Inc. <AMZN.O>, a
relatively new and hugely successful online bookseller.
This has temporarily driven up the price of taking stakes
in private start-up companies, analysts said. At the same time,
would-be initial public offering buyers have grown leery of
high valuations and are cautious about what they purchase.
"I think the banks are looking at some of the pipelines and
seeing some business that might materialize or surface sometime
during 1999, but it has been very slow in terms of bouncing
back to where we were nine months ago," Diana Yates, an analyst
at A.G. Edwards, said.
Carla D'Arista, an analyst at Friedman, Billings, Ramsey,
said: "People don't like the valuations. Given the strength of
the economy, valuations are tough."
The slowdown in private equity markets, which analysts said
can comprise roughly 10 percent of a big bank's business, is
temporary and banks are shielded because they invest very
warily in a wide range of upcoming businesses, from Internet
technology to hog farms and guitar stores, analysts said.
"The banks participate in the private equity market very
widely," said Robert Albertson, who runs global financial
services investment firm Pilot Financial. "They've had very
consistent returns...I can't think of a year in the last 10
when they haven't done well in venture capital."
Chase Manhattan Corp.'s <CMB.N> giant private equity arm,
Chase Capital, which has about $7 billion under management,
posted $967 million in revenues in 1998, a 16 percent increase
from 1997. Its investments are far-ranging with a particular
focus on health care and medical devices, media and telecomms,
consumer goods and the Internet at the moment.
Banks also have a better general understanding of most
business models and entrepreneurism, which helps them when
deciding where and when to invest, Albertson said. They
remained steady investors who were always commiting new capital
into various enterprises, analysts said.
William Sahlman, a professor at Harvard Business School,
also said many banks invested bigger sums after a private
company had been up and running for a while, which was a
lucrative market.
But finding new places to put money was still one of the
most time-consuming challenges of the private equity business,
even though banks make money each year through savvy
investments, and lofty prices did not make it any easier.
"The goal is to sell a growth company to a strategic or
financial buyer and conduct a leverage recapitalization, or an
IPO," Michael Mayo, an analyst at CS First Boston, wrote in a
recent research report about BankBoston Corp. <BKB.N> "The key
to growth in this business is replenishing the deal flow, since
100 percent of the portfolio turns over every five years."
Raphael Soifer, an analyst at Brown Brothers Harriman,
said: "Keeping the pipeline full of good deals is always a
challenge, particularly now when the market is high and there
is so much capital chasing deals."
Caution among IPO investors, when stock prices appeared
excessively high, also made it hard for venture capitalists to
cash in on their stakes, analysts said.
BankBoston's goal was to look at as many private equity
deals as possible because it closed on less than 2 percent of
the deals it looked at, Mayo wrote.
"They pour through opportunities and they remain very, very
selective," Pilot Financial's Albertson said. "Their rejection
rate is clearly over 90 percent, as it probably should be with
any ventu... |
