Hi, I'm Joan Solitar, Senior Managing Director of External Relations and Strategy at Blackstone. Thanks for joining us today for Blackstone webcast featuring Joe Barata, Global Head of Private Equity, as he discusses his outlook for 2014. We're excited to have Joe with us today and to have so many of you, more than 1800 people signed up to tune in. Joe's been an integral part of the Blackstone investment team since 1998 and actually spent 11 of those 16 years building out our European business out of London. Joe is responsible for some of the firm's most notable investments, including Merlin Entertainment and SeaWorld, to name just a couple, and now, of course, oversees all of the global private equity investment activity and operations.
Following Joe's formal presentation, there'll be an opportunity for questions. You can do that by clicking on the Q and A box at the bottom of the screen anytime during the webcast. You'll also notice on the screen several other options, including download slides, refer a friend and Twitter. At the end of the PowerPoint, you'll see a full list of disclosures. And with that, thank you again for joining us today, and I'll turn things over to Joe.
Thank you, Joan. It's good to be here today to talk about what we're seeing in the markets. I'll start by saying giving a little context to the current private equity market, what we saw over the last 12 months, and then get into how we're deploying our capital. It's a tricky environment. There's plentiful debt at historically low cost that's driving purchase prices up.
We have robust equity markets. The IPO market is wide open. The alternatives for sellers are as numerous as they've been in many years. Private equity buyers are confident on the back of recent strong performance and votes of support by the limited partners with new funds. The consensus outlook for the economies in the Western world anyway is rosy.
This all combines to high prices for traditional LBOs, those sold at auction with high visibility business models, with good management teams, with a high degree of financeability. Margin for error in these transactions, in our opinion, is largely priced out. Let's get into some of the specifics of the market context. As you can see, high yield and leverage loan volumes are at a record in 2013. This is driven by not only new transactions, but also significant refinancing activity and dividend recaps.
It's not all driving new deals, but the quantum of the issuance is notable. On the right, you see the historically low cost of funds of the sub investment grade bonds and loans. On average, we're seeing 4.5% less lower cost on the coupon of a high yield bond or a leveraged loan than the 20 year average. I think this is going to persist into perpetuity is dangerous. And we're seeing some of that activity in some of the transactions we're seeing, again, for regular way auction product LBOs.
Looking at deal volumes in 2013, where does it stand in an historic context? We're still well off the highs of 'six or 'seven, but frankly, those were the anomaly years, not the norm. Deal volumes in 2014, I don't suspect will be materially higher than 'thirteen, unless we see a large resumption of corporate M and A activity. And then you could see more corporate carve outs and things of that nature. But if you look at 2013 in the United States, you can see the bars there, North America, Europe and Asia.
In North America, the deal volumes are roughly where they were in 2,004 and 'five. So I don't think we're going to see a major boom in private equity LBO activity 2014. What's notable on this slide, I think, is the lack of activity in Europe versus historic norms. Even in the pre, call it, bubble period, 2,004 and 'five, European volumes are down nearly 40% versus those. And as I've said, U.
S. Volumes are back to the 'four, 'five levels, and we think they'll stay at that level for the coming years. Putting purchase price LBO purchase price multiples into context over the last 12 or 13 years. As you can see, they came way off in the post crisis period. We were fortunate to set up some really compelling transactions in 2,009 2010 at lower than historic multiples.
Multiples have come right up, as you've seen. 2013 is back to about 9x. And importantly, the rate of change in those multiples is increasing over the year. In 2013, in Q4, LBO multiples were closer to just over 10x back to the 2,007 and 2,008 peaks. This is a generalization.
It doesn't mean that the types of LBOs didn't justify those multiples or they were higher growth companies, but it's just indicative of a trend that we're seeing. What types of deals are getting done? This is in 20 13 for LBOs greater than $1,000,000,000 the types of transactions. As you can see, nearly half the market is in secondary transactions, where one private equity firm is buying 1 from another. Public to privates, 25%, corporate carve outs, 30%.
Think historically, secondary deals have represented around the 3rd. So it's above norm. Why are secondary deals more prevalent than ever before? And is there an issue with that? Well, in our opinion, the large private equity portfolios constructed in 2,005 and 'eight has now left a large crop of matured companies ready for exit.
And so there's just more product available in the secondary market than there ever has been before. These deals can be good ones. There's nothing wrong with buying a company from our competitors. But as long as there is scope to really drive a change in the business, buying something that someone has already optimized is not a recipe for continued success, in our opinion. So when and we do buy companies from our competitors, they tend to be a bit smaller and they tend to revolve around a consolidation strategy or a large investment cycle, not just assuming the continued performance of the past.
Our clear preference is to do corporate divestitures, buy underperforming public companies or make investments in them in a structured way, as we did recently with Crocs or make large growth capital investments. Where the deal is happening by sector, as you can see on the left, this is generally representative of what we'd see in any year, telecom, media, industrials, consumer representing the bulk. Energy has been relatively small across all LBO activity. We are overweight in energy. 25% to 30% of what we do in private equity is in energy and power.
Why? We're in a multi decade CapEx cycle in the extraction and transportation infrastructure of energy. Also in power development, both renewables in the Western world and fossil fuels in the developing markets. And we're a big participant in the funding of large scale power development projects all over the world. Energy in general has an enormous demand for capital that's not readily met in public debt and equity markets.
We think we can price our capital a bit more efficiently as a result in this sector because of the enormous demand for it. So turning to our strategy and investment themes after the context of 2013, how are we acting on what we're seeing? Our primary objective whenever we make an investment is for every dollar we invest to return 2.5 on average to our limited partners. We are committed to that discipline. To do this though, in this competitive environment, we have to construct a differentiated we're in the sector in which we're buying an asset.
We can't just rely on the flow of investment banking auctions. What are the common themes in our deals? As you can see on the slide, we have a strong value orientation, period. We don't want to pay away to the seller all the actions we're going to take to make the company better. We've done a lot in energy and financial services companies where we're creating these businesses without goodwill at a multiple at basically the cost of the book value, not at a significant multiple to it.
When we're doing traditional LBOs, ours tend to be done at lower multiples, either because of when we did them in the cycle or the types of businesses we're buying, where we see scope to meaningfully improve those companies. We have to have a well defined post acquisition value creation strategy. Half of what we've been investing in are buy and build platforms, where we start with a smaller business and make it bigger, either through organic capital investment or add on acquisitions. And we've done a lot of growth equity investments, both in energy and in consumer. As evidence of this value creation strategy post acquisition, in the 3 years post closing of our investments since 2,009, the average 3 year EBITDA compounded annual growth rate is 9%.
That's not GDP growth. That's not just the sector growth. That's growth on the back of actions we are taking to improve the High levels of low cost leverage cannot be the primary driver of returns. The fact that debt is historically cheap and plentiful is interesting, but it's not enough of an investment thesis. In fact, in our deals, 4 times EBITDA is the average setup multiple of our transactions.
So we're buying businesses at lower levels of leverage, requiring more operating intervention to drive the return. When we think about returns, we don't think about just the levered return with a large amount of low cost leverage on top of it. We think about the return to the entire capital structure, the unlevered return. It has to be better than what our investors can do in the public market. This is our true north.
So how are we acting on this set of principles? So as I said, there are sectors and geographies in which the requirement for capital exceeds its readily available supply. As I've said, power development, renewables projects in the Western world, fossil fuel, hydroelectric projects in emerging markets, where we're trying to lay off of the either the country risk or the counterparty risk by having much of the power sold forward. Energy extraction and transportation. We're building alongside a corporate partner, one of the largest liquefaction facilities in the United States, dollars 15,000,000,000 capital project.
We've invested $1,500,000,000 of our investors' capital in this, mission critical thing for the U. S. Economy. We're also creating in the United States and Europe consumer finance businesses to step in where the banks have failed to provide financing for consumers to buy cars, to refurbish their homes. We look for cyclical opportunities.
Right now in this part of the cycle, there's very little that has earnings levels below historic averages or where something's just out of favor. And EBITDA multiples or PE multiples are lower than average. Everything's trading near 52 week and even all time highs. But there are some exceptions, U. S.
Power generation, for example. Recently, we bought 3 gas fired power plants in Texas from a large U. K. Energy company called Centrica. Texas is a very attractive power market.
Gas prices are at near historic lows, although not today, given the weather, of course. As gas prices normalize, as power consumption continues to grow in Texas, this is in this business, we think we could double the cash flows from the company. Also in mining services, as the structure of growth in China and other emerging economies is becoming less capital intensive, you're seeing prices come off for industrial metals and gold and other mining assets. And exploration activity stopped, and you see you're beginning to see some distressed in this sector, and we're mining for opportunities in it. This is the most important category of investing that we do and we continue to focus on.
These are idiosyncratic investments. They're opportunistic. They're sourced by our sector teams, but they have common things. Company specific growth opportunities completely uncorrelated to what's going on in their industry or in the economic cycle, where we're able to identify a specific catalyst for growth that we're going to take action to exploit. It requires a high degree of management intervention and often turns around geographic expansion.
For example, we unlike a camera in Germany, along with the family office that controls it. They need help in increasing the manufacturing capacity and in distribution outside of its core markets in Western Europe and America, places like China and Brazil. Same story with Jack Wolfskin, an outdoor apparel company we control, significant growth opportunities in Russia and Asia. Crocs is an interesting example of structuring an investment in a public company that was undergoing some form of managerial operational underperformance, where we come to the table not just with money, but with expertise and as a catalyst for change in both management and operating orientation. It's a clever structure with downside protection for our investors, yet fully convertible into the common equity of the company, if the share price was to increase significantly, which it already has since we announced the transaction.
Finally, there are certain sectors where really we act as strategic buyers, not just financial people. Food assets through our ownership of Pinnacle. Leisure, there's nobody that owns more leisure and hospitality assets in the world than we do between SeaWorld, Merlin, Hilton, other of our hotel assets. This is a sector in which we really behave as strategic buyers. Also, in healthcare services, where we've been very successful over the last 1.5 years in buying these assets.
So in sum, it's a tricky environment. We're navigating it with a very specific strategy with a high bar on both value and operating intervention. Despite our selectivity, the pipeline is good. In fact, it's possible this week we'll announce transactions in which we'll invest $1,000,000,000 So we feel good about our ability to act on this. It's a tricky time in the market.
We just can't be waving in what's happening in the market and take our fair share. If we do this well, we're going to deliver terrific performance for our investors despite the environment. Thanks very much. And I'll hand it back to you, Joan.
Great. Thanks, Joe. So I'm going to go through questions that you're submitting, and I'll try to consolidate some of the topics so that we can get to all of them. But so just to start, last year, you told your LPs that you would likely be selling more than you would be buying. So how are you thinking about that in 2014?
And is it still reasonable to assume that you can put out about $3,000,000,000 $4,000,000,000 per year on average?
Right. This really dates back to 2012. We had a whole crop of companies where our operating intervention strategies have worked and the businesses had responded and they were ready for exit. So we began preparing in the summer of 2012, 3 or 4 of our companies to either get public or to be sold. You can't just snap your fingers and decide to sell something and do it the next month.
There's a long lead time, sometimes 2 or 3 quarters, sometimes a year. So the actions we 2012 before it was obvious that it was the right time to sell and as the markets rallied through 2013, we were really well positioned to take advantage of that. In fact, we've got 4 large scale companies public. We did a lot of secondary sales of both those companies and ones that were public before them. We sold assets to strategic buyers.
And in total, we returned $10,600,000,000 to the investors in the Blackstone Capital Partners funds. For 2014, we're well positioned to continue that liquidity with companies that are already public, a few that we hope to go public over the coming months, some assets that we think can be sold to either strategic or financial buyers. I don't expect it to be of quite the same volume as 2013, but we'll be active. On the new investment side, as I said, I think we're going to be able to invest $3,000,000,000 $3,500,000,000 this year, which would put us ahead of our anticipated pace.
Great. So there's a question around secondary market buying and whether the supply is coming from U. S. Versus non U. S.
And then just tagging on to that, maybe just talk a bit about how you are thinking about non U. S, including emerging markets?
In terms of new investment opportunities.
But starting with the secondary piece, where it's coming from?
Yes. Well, as I said, secondary LBOs, assets that we're buying from our competitors, particularly in Europe, predominates the market of transactions above $1,000,000,000 And we will buy a few companies from our competitors over the coming years as long as we have a way to intervene to drive value in those companies. I think we'll be most active in the United States over the coming year. I think probably 2 thirds to 75 percent of our capital will be deployed in the U. S.
Europe, we're seeing really interesting opportunities. I think about 25% of what we do will be in Europe. In Asia, in particular in China and India, where there's been a serious lack of liquidity and currency issue, companies need capital, I think we'll continue to be active in those markets as well. Maybe 10% to 20% of what we do will be in India and Asia.
Okay. And the performance of the Blackstone Stone funds has been quite strong even for the vintage 2000 and 6, 2007 and certainly relative to peers in the industry. So a 2 part question. First, what do you think the Blackstone Edge is? And then second part, how important is scale to sourcing deals and driving value?
So I would say we, along with nearly all of our high quality competitors, have had a terrific run-in the last 2 or 3 years. Now the equity markets, of course, have helped out. So I'd say our experience has been terrific, as has some of our terrific competitors. So the asset class, the private equity asset class has proven an ability to outperform the public markets and to be of real value to our investors. It's not just Blackstone, I want to make that point.
Yes, we've done really well, but so have our competitors. What's our edge? I think our edge is in our commitment to the return discipline that I mentioned. We'll be patient. I think one of the most important variables as an investor that dictates performance is your discipline, not doing things when it doesn't feel right.
So we will invest less and be unapologetic about it at certain periods of time when we don't see the value. That's going to in order to the benefit of our investors over time. Secondly, we will not buy something unless we can do something actively to improve it. And our ability through the large scale of our operating infrastructure, as you know, we just hired Dave Calhoun, who ran one of our successful large portfolio companies, Nielsen. Our ability to actually affect change in these companies is real.
It's not just words. So that's our edge. How important is scale? It's enormously important. The scale required to effectively source, identify angles, drive operating improvement through the companies once we buy them is enormous.
It requires multi sector, multi geographies, hundreds of people on the ground in the geographic regions, a brand that people understand, a brand for being reliable as a counterparty, all these things are required for successful transaction sourcing, and importantly, post acquisition value creation. So I think the scale required to do this business really well is as big as it's ever been.
Okay. You mentioned growth as a sector, if you will, I want to call it a sector, that you're very focused on. How are you structuring those deals? Do you care all that much about having control? How important is that?
And how are you thinking about returns on those investments?
So the growth platforms I talk about, sometimes we control them, where it's a company we're buying and we're going to consolidate in the industry. And other times, like in a Crocs or in a Leica, we don't control it. What's important there, we cannot just be passive. As I said, the bar is our ability intervene to drive value. We don't have to have absolute control, but we have to have a board where we have a basis of understanding for what we're going to do post acquisition.
It's agreed upfront, and we're able to go do it and effect that change. If things don't go as we planned, we need to have the ability to change the management team. So there are ways to influence companies without having to be a majority 51 percent shareholder, and we're very focused on ensuring that we can have the influence we expect when we do something that's control. The nice thing about non control deals in an environment like this is you pay less for not having to acquire control. The last thing I'd say is around exit.
We're always certain in a minority situation that we have the ability at some point in the future, typically after 3 to 5 years, to force an exit to get liquidity for our investors, very important feature of investing in non controlled situations.
Great. And notwithstanding today's announcement around Comcast and Time Warner, as you noted, M and A volume and waiting for it's been a bit like waiting for Gadeau, and it's impacted deal volume. That said, your chart shows year looks pretty much like a normalized period. So if we do see a resurgence in M and A, would you expect your activity to pick up in terms of volume or just the types of deals that you're doing?
I think you have a pickup in volume to some extent, but not in a transformational way. I think the deal volumes won't return maybe ever to the 'six, 'seven period. You'll see certainly, you'll see the types transactions change to more corporate carve outs or assisting corporates to buy others, maybe they're capital constrained in some way. So it'll be a very positive thing when the corporate M and A cycle resumes. I think it will.
I think in a lowish growth environment that we're in, one way for corporates to grow their earnings per share is through the extraction of synergies through strategic consolidations. And out of that tends to come non core divestitures. I mean, if you look at the 3 assets that were sold by InBev when they bought Anheuser Busch, SeaWorld to us, the Korean beverage deal to KKR and the Star Bev Company to CVC. Those 3 firms did wonderfully with those investments, not because InBev didn't sell them intelligently, but because they had many other things to do. And they allowed the hard work, the hard draft to be done by us or by KKR or by CVC.
And each one of us did a wonderful job. We'd love to see more transactions like that. And I expect that we will when the corporate M and A cycle resumes. May not be this year, may take another couple of years, but it will come.
On the last investor call, it was mentioned that portfolio companies were actually showing really good revenue and EBITDA growth faster than S and P. What are you hearing from corporate CEOs? And what does that make you think about broader economy?
I think we're seeing continued momentum in the earnings through this quarter, although we haven't seen the results of the quarter. But we're seeing continued momentum, both in our portfolio companies and the businesses that we're doing diligence on right now. It's not breakout growth. A lot of it's still margin expansion rather than top line growth, but it's steady, consistent, maybe even predictable growth for the next 2, 3 years, I'd say.
So it seems like you moved back from London just before things started getting more interesting in Europe. What are you looking at in Europe, maybe country specific or sector specific?
Well, we had we made a call back in 2010, the first time the bond yields in Spain got above 6% or 7%, that Spain was going to recover. It had reasonable governance. It had a real economy and a lot of people, that that would be an interesting place to invest. We've hired 2 people in that market over the last 5 years. We've made a couple of investments, one of which, Mavisa, we've recently agreed to sell to a competitor, one of its competitors, corporate.
So we've done very well in that market. We continue to look actively in Spain, particularly in consumer finance right now. I'd say Europe in general, the opportunity has been more on the real estate, the distressed credit and on the tactical opportunity side. On the private equity side, we're not seeing really deep value in traditional LBOs there. Those companies are financeable, prices stayed high and growth rates are likely to be lower in Europe for a traditional GDP growth business than they are in the U.
S. Our approach has been defined good consumer companies that have growth outside of Europe, so it's not tied to GDP growth or buying really good assets at lower multiples of cash flow in countries with more distress like Spain and possibly Italy. That's our approach in Europe.
And then in the emerging markets, we've seen capital retrench, markets are down, currencies are down. Is that just a bigger
inactive over the last 3 years in the emerging markets, in particular, places like Turkey and South Africa, bit less so in China. And that was a good decision. Currencies have been crushed in those markets. And we invest in dollars, as do most of our competitors. Even if you have a local fund, you're investing either in euros and dollars.
So that currency overlay and what it can do to your dollar based returns hadn't been effectively priced into that market. So just on the basis of that, it's more interesting. I think those economies are poised to have structurally higher growth rates than the Western world. In moments of distress or volatility like we're in now is a time to act. We've certainly increased our sourcing and due diligence activity of companies in Asia in the last 6 weeks.
And specifically on Brazil, there's a a question around leveraging the relationship with Patria, currency is down quite a bit, real estate made one of its first investments there with AlphaVile. What are there any sectors in particular that look interesting?
Yes. We recently did a large acquisition for one of our portfolio companies in Brazil. Our company called PGI bought a publicly traded company in Brazil, terrific add on acquisition. We've been looking at a lot of assets in healthcare and energy with our friends at Patria. We look at transactions above $150,000,000 of equity.
That market has tended to be below $150,000,000 But I'd say 4, 5 times a year, there are large scale acquisitions that our colleagues at PatriaSource that we work on with them. In fact, we've got 3 things that we're working on right now with them. And I expect this year, we will do something of reasonably large scale in Brazil.
Okay. This is a big question that will probably take a little while to answer. But when you think about the inter play of purchase price, leverage and then operational improvement is driving ultimate deals, Can you just give us some color in the current environment on where the deals stand in terms of value creation on each of those benchmarks?
Well, the opportunity around low purchase prices has been gone for the better part of 2 years. When we bought SeaWorld in 2009 at 6.5x EBITDA roughly, you didn't really have to do much to the business to make money if you believed in the recovery of both the capital markets and the U. S. Economy. If you were able to drive operational improvement, which we were, you did really, really well.
So the opportunity just to buy something cheap is virtually over. Maybe there's a few cyclical opportunities that I mentioned earlier, but largely over. So on that metric, you're really not able to create a lot of value. Leverage, you can gear up the yield you're able to create a company at today to what looks like a seemingly attractive leveraged equity yield, because the cost of debt is so low. Weighted average cost of debt funds in one of our LBOs, believe it or not, is sub-six percent because you've got bank debt at LIBOR plus and you've got the bonds anywhere in the 6% to 8% context.
So if you believe that the leverage markets are going to stay like they are today and the discount rate is going to stay as low as it is today and the 10 year treasury is going to stay as low as it is today, you could probably make money on leverage. We are not underwriting that in any of our transaction. So that's kind of off the table in terms of real value creation. That leaves you with operational improvements, which are both intervening to improve the operations and the margin structure of the companies and to go do strategic acquisitions, make growth investments in either other companies or in new product lines or in people or in productive capacity. And that's where the value is created, enhanced by the low cost leverage that is on offer today.
And that's how we think about it. And that's why when I say operate, we won't do anything unless we can intervene to improve the fate of the company. That's why I say that, because it's hard to make money just buying something at the prevailing market price and expecting asset prices to go up from here. They might, but they probably won't unless you do something to the company to drive growth.
And how are you thinking about realization? So one of the great things about the fund structure is you don't have to sell at the wrong time. And so we've held assets through the downturn. EBITDA growth, as we said, has been quite good. Markets are healthy.
How should we think about it this year and next year?
Well, I mean, the great thing about the private equity structure is that our capital, while not permanent, has permanence. We're not forced to sell in a fire sale. Our LPs put their money with the investors, put their money with us knowing that it will be locked up for a long time. And that inured to the whole industry's benefit in 2,008, 2009, 'ten, nobody had to sell anything. We weathered the storm and we took advantage because we can control the exit, we took advantage of the upturn in the market of late.
I think over the next 3 or 4 years, you will continue to see large scale exit activity among big private equity firms. I hope there will be some volatility to create some interesting entry points for new deals. If that were to occur, as did occur at the beginning of the year, obviously, things are trading up again. We're not going to be selling stuff when markets are in turmoil, when markets are down, when people are fearful. And we have the flexibility in the structure of our capital to not sell stuff when markets are volatile and people are fearful.
And then final question. You've worked through several cycles. How would you articulate the competitive environment is today? And is there any change from regulatory shifts or burdens placed upon banks, any change from middle market, etcetera?
No, I think we've this has been a competitive market since I joined Blackstone in 1998. And before that, I was working in a middle market firm. It's always been competitive. So there's no meaningful change in that. I don't equity capital markets are enormous globally.
The number of family owned businesses and non core corporate assets are enormous and private equity represents a really small percentage of the available transaction flow. Of course, the prices we pay are affected by what's going on in the equity markets. It has a bit less to do with competition on a micro basis and more to do with sellers' expectations and their alternatives outside of selling to a private equity buyer. So I don't think the competitive intensity is any different. The types of transactions we're doing are different, yes, but they're different from kind of cycle to cycle.
In the mid-90s, we were making investments in telecom infrastructure assets to build out broadband and wireless networks. In 2,002 and 2003, we were buying cyclical assets in chemicals and auto, because they were for sale cheaply. We were buying oil refiners at different points in the cycle. We were buying coal mines at different points in the cycle. So we our responsibility is to respond to what we're seeing opportunistically in the market, not be beholden to any one sector vertical or transaction type.
That flexibility has allowed us over 27 years to generate consistently high returns for our investors. Every single fund we've invested, Blackstone 1 through 6 has returned more than $1.5 for every $1 invested and most of them have returned close to $2.5 So that consistency of performance turns on our ability to remain flexible and nimble in any market environment.
Yes. I really like the statistic that the losses in any of the funds, frankly, is so small that it's better than AAA bonds. So with that, thank you very much. Thanks, everyone, for joining us