David McNew/ Reuters Chairman and CEO of Apollo Global Management, LLC Leon Black (L), Founding partner of TPG Capital David Bonderman (2nd L) and Founder and CEO of Providence Equity Partners Jonathan Nelson take part in a panel discussion titled "New Directions in Private Equity" at the Milken Institute Global Conference in Beverly Hills
The good times are rolling again.
That is according to Josh Harris, the cofounder of private equity firm Apollo Global Management.
"The financing markets are back. They're back in all their glory," Harris said on a first quarter earnings call on Thursday.
The New York-based private equity firm's potential leveraged buyout deals evaporated when the high-yield market went in to a tailspin late last year. Investors were spooked by the possibility of wide-spread defaults, prompting a massive selloff.
That made raising new financing for takeovers was almost impossible. Harris had said in January that the "financing markets are shutting down" and the firm's "entire private equity pipeline dried up," according to Bloomberg's Devin Banerjee.
That hurts private equity firms because they usually use debt to finance takeovers. Private equity activity dropped off sharply as a result.
It also hurts Wall Street banks, which tend to get a big chunk of fees from private equity firms. The amount of fees PE firms paid to Wall Street banks dropped 38% in the first quarter this year to $2 billion, according to Dealogic. That's the lowest since 2010.
But things have changed. High-yield bonds, also known as junk debt, have rebounded. Financing markets have reopened. Private equity deals are happening again. And that spells good news for Wall Street.
Devin Ryan, an analyst at JMP Securities, asked Harris about the financing markets on the Q1 earnings call. Here's what he said (emphasis ours):
Yes ... the financial markets are back. They're back in all their glory. Literally, again, things were relatively shut down for a few months and now we concluded a number of transactions based on having a rough expectation or an expectation of a relatively rough financing market and pricing that in. And then sometime having a little luck is good because the deals - we priced Fresh Market, we priced ADT.
Obviously, we still have a pipeline of deals to go into the market, but all the deals are getting done ahead of our expectation when we did the deals. And so the financing markets, the high yield markets was down five and now it's up six. It was down five last year. It's been up six or so in the first four months.
Apollo announced a $6.8 billion deal to buy electronic security systems provider ADT Corporation in February, and also recently announced a deal to buy grocery chain Fresh Market for about $1.4 billion.
Elsewhere in private equity, Hellman & Friedman this week has agreed a deal to buy health-insurance agency MultiPlan from Starr Investment Holdings. Activity is picking up again.
Now, the market can take a turn for the worst again just as quickly as it rebounded. Harris is focused on taking advantage of the more positive conditions while they last. He said (emphasis ours):
So things are - the good times are rolling again at least for this month, but you can't really predict what will happen given the relatively muted financial fundamentals of the economy, but very aggressive monitory technical out there in the world.
And there's sort of a battle between fundaments and technicals and one month fundaments wins and then another month technicals wins and you just have to be really on your toes to navigate what's a very challenging environment.