Year-end is always a busy time in the valuation business. In addition to helping clients plan for estate and gift transfers, we often assist our corporate clients with purchase accounting matters that may have been overlooked during the calendar year.
Whereas we’re always busy with standard financial reporting work, we anticipate a rush of capital adequacy opinions at year-end. These projects normally come from private-equity funds, enhancing investor returns, without selling their assets. As competition for private companies continues to rise, and trading multiples creep-up, institutional investors have incentive to hold their most productive investments. The same refrain sounds from investors protracting their holding-periods — what to do with the money, once liquid?
Over the course of several years, we’ve seen a confluence of elements influence the market for dividend recapitalizations. Mostly, these are systemic factors, like favorable dividend tax rates, the low cost of debt capital, a positive economic outlook, and limited exit options. The persistent combination of these factors has resulted in demand for solvency testing beyond year-end. So far, in 2018 Intrinsic has performed several engagements, testing solvency for dividend recaps, which we normally would not see this early in the year.
In several recent transactions, we’ve encountered an old familiar figure in a brand new role; one that we normally wouldn’t have expected. KKR has played prominently as a quasi-underwriter in recent debt raises, for dividend recaps. In full disclosure, we’ve never witnessed KKR, or any other private-equity firm serve as a lender on one of its / their own deals. However, seeing KKR serve as an investment banker for debt capital seems new and innovative.
Perhaps this story tells two tales. On the one hand, private-equity funds appear reluctant to sell their productive assets, when doing so raises the challenge of redeploying proceeds in a scarce market. While, on the other hand, some of the largest private equity funds have more money than targets, so they’re lending to their brethren to float other deals.
From an armchair observer, it appears the contribution of capital from the credit businesses of big private equity may be adding to an endless supply of money chasing a finite number of deals. Simultaneously, we’re enjoying the opportunity this creates in offering our opinions on solvency tests.