RADIO INTERVIEW on 102.7 - CLASSIC BUSINESS DAY

12/06/2006 - Kevin Homann is interviewed by Lindsay (Classic Business Day on 102.7)

Does greed end in trouble?

Presenter:	Lindsay Williams
Guest:	Kevin Homann

Classic Business Day looks at private equity and the world of the unimaginably rich, and gets Kevin Homann on the line from Spirit Capital to find out if things are changing.

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Lindsay Williams

We live in an imbalanced world - we spoke earlier to Patrick Craven from Cosatu about workers in the public sector looking for an increase of around 10%, where if a worker was currently earning R3000 that would translate into an extra R300 a month.

A recent article about the “new kings” of Wall Street offers a rare glimpse of the top ranks of executives in the private equity industry - it’s a world of private jets, personal helicopters and take-home earnings that run into hundreds of millions of dollars - and one of the most powerful names in private equity, Blackstone Group, was obliged yesterday to reveal a breakdown of its finances as part of its preparations for stock market floatation, where one founder will receive $449million and will still retain a stake in the business worth $7.7billion.

However, current trends in private equity buyouts involving major listed groups makes significant changes in this investment category inevitable, according to Spirit Capital. Kevin, is private equity changing?

Kevin Homann

The driver of that article is really that in the South African market there’s a lot of competition at the top end of the market - valuations have been driven ever higher with higher bids. What we think is happening is the returns inherent in these transactions will erode over a period of time - at the top end of the market valuations are getting topish from our point of view.

Lindsay Williams

Yes, if one looks at the history of Blackstone it’s almost like a history of private equity - in 1985 the company was formed with $400,000 in “seed capital” and when it lists it is going to be worth something like $88billion. Surely that tells you we are getting to the top of the market? There’s a lot more entrants now - does the fact that they’re listing on the New York Stock Exchange and taking their money out means that the heyday of private equity is over?

Kevin Homann

I’m not sure the heyday is over, but it’s getting a lot tougher out there to transact effectively - the competition has increased, and valuations have been driven up. I think the institutional investors are starting to resist giving up quality assets on the JSE - the only way those assets can be bought in the current market is by paying a substantial premium. It’s easier to get into these assets at these valuations than it might be to get out of them in five years with a profit.

Lindsay Williams

Private equity and hedge funds are inextricably linked - a private equity deal is mooted and the hedge funds jump on it and they almost hand the deal to the private equity company. There was a shot across the hedge funds bows yesterday in the US with the regulators again saying be very careful as there could be some kind of fallout from hedge fund activities. Do you agree with that? Do you think there’s a couple of potential disasters waiting to happen with private equity and hedge funds being linked?

Kevin Homann

I think markets where hedge funds and private equity funds are playing are efficient - so I don’t have an inherent problem with the fact that the hedge funds and the private equity funds are operating. I just think that the market’s starting to become quite frothy in terms of the valuations - I think inherent in that you’re going to find that some of these private equity buyouts are going to end in unhappiness somewhere down the line. The gearing levels being put into these transactions at this level I think are significant - maybe the cash flows of these businesses won’t be able to support that kind of gearing over the next five to seven years.

Lindsay Williams

Domestically three things spring to mind - the Shoprite deal went bad, we’ve seen recent rand weakness from 6.88 to 7.28 against the dollar a few days ago, and three interest rates have been rising here and also potentially in the US, Europe and the UK. Are those three factors going to make it more difficult for private equity firms operating in South Africa?

Kevin Homann

Absolutely. I think that most of these transactions are being done on the basis that the underlying businesses are going to continue to grow - that they continue to show fantastic cash flows - and that’s in a market where maybe interest rates are starting to increase. Maybe those assumptions aren’t valid in the current market - maybe we’ve got tougher times ahead, and as a result of that the valuations that are being paid might not be met over the next couple of years.

Lindsay Williams

So we might not be able to turn $400,000 into $88billion - incidentally that’s the amount of money Blackstone actually manages rather than what the company is worth. There’s still a bit of cash to be made - let’s face it. Any particular companies or sectors on the JSE that you still fancy as being targeted?

Kevin Homann

I agree that there’s always money to be made - there are always good opportunities out there. Possibly the contrarian view is maybe to go at this stage - look at some of the more neglected companies out there as targets. I think the sexy businesses out there are highly valued - those should probably be avoided at this stage.

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