There weren’t a lot of bright spots in the L.A. financial scene in 2009, but private equity might be the closest thing.
Several private equity firms, particularly those specializing in turning around distressed companies, remained active by raising funds and closing acquisitions.
However, it was far from a great year. The tightened credit markets meant firms had little or no financial leverage, leading to fewer and smaller transactions. And with the exit markets tight, private equity firms have had to take more time and care overseeing portfolio companies.
Still, with the recession weighing on virtually every sector, investors with enough cash were able to snap up companies at attractive valuations.
One of the most active was Platinum Equity LLC, the Beverly Hills firm founded by billionaire Tom Gores. The firm, which typically targets operationally distressed companies, closed 14 transactions in 2009, including the $64 million acquisition of information technology company Pomeroy IT Solutions.
“This is a market we think we were built for,” said Mark Barnhill, a principal with Platinum Equity.
The firm has plenty of cash to get deals done: Platinum Equity has only deployed about 40 percent of a $2.75 billion fund it closed in September 2008.
“In a market where overall M&A activity is substantially down, clearly we’ve been among the most active firms out there,” Barnhill said.
Opportunities were not limited to distressed investing.
Gerald Parsky, chairman of Aurora Capital Group in Westwood, said his firm has found success with its primary strategy of investing in healthy companies and helping them improve efficiency. In a recent interview, Parsky called the current opportunities “as good as I have seen in the last 30 years.”
“When you come off a deep recession, capacity is not being fully utilized and you can acquire a business at a reasonable price,” he said. “As the economy improves, you have an opportunity to significantly grow that business.”
In September, Aurora announced the $142 million acquisition of HLTH Corp.’s Porex unit, which manufactures medical devices.
Trying to capitalize on the opportunities in Los Angeles, the largest private equity firm in Washington state, Evergreen Pacific Partners, recently opened an office in Westwood.
Meanwhile, L.A.’s fifth largest private equity firm, Kayne Anderson Capital Advisors in Century City, in July closed its fifth private equity fund, totaling $820 million and targeting oil and gas companies.
Private equity’s performance in 2009, however, is only successful relative to the struggles of the greater financial services industry. Indeed, private equity performance was down considerably from years past.
A study released this month by Ernst & Young found that most private equity firms were “blind-sided” by the downturn in the economy and have had to scramble to adapt.
More than half of the firms surveyed said the lack of credit was a major challenge, and most said they have held more cash on hand and done smaller deals due to the market’s uncertainty.
Even Platinum Equity, Barnhill admitted, had to “turn inward,” reassess its holdings and devote more time to its portfolio companies as the economy turned south.
Many in the industry are bullish on the future, though. According to the survey, there is $400 billion of private equity sitting on the sidelines ready to be deployed.
“PE firms have a history of being adaptive and innovative in volatile markets,” said Jeff Bunder, a private equity specialist for Ernst & Young, in a statement. “Past recessions have provided some of the industry’s highest vintage returns, and with capital to deploy we should see an increased pace of investing in the next couple of years.”
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