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Stanford GSB News

 

Coulter Forecasts Upturn in Private Equity Deals

February, 2004

STANFORD GRADUATE SCHOOL OF BUSINESS—After a run of poor investments in the late 1990s—driven largely by the telecom industry meltdowns—big private equity funds will likely be bolstered by more big deals, James G. Coulter, founding partner of Texas Pacific Group, told the Principal Investors Conference at Stanford Business School.

Coulter, MBA '86, in his February 18 keynote remarks at the student-sponsored conference, said a variety of secular economic trends will provide the boost. Already the pace is up. Since 2000, there have been 47 private equity deals requiring more than $500 million in fund equity, compared with just 10 such purchases through the entire 1990s, he said. The purchase prices funds pay for corporate restructuring candidates are sensitive to a number of factors, including how many big deals come on the market, the count of competing bidders, and the leverage available for purchases.

"Competition within our industry is fierce, just as it has always been," Coulter said. However, competition from two outside sources has diminished. Corporate acquisitions have fallen sharply from the late 1990s—restraining the so-called "strategic" buyers. Between 1997 and 2000, Tyco Inc. alone bought over 700 companies—taking deals from the private equity market. Now, strategic buyers are net sellers, making more transactions available to private equity, Coulter said. A drop in initial public offerings also has cut competition, a trend Coulter cautioned could "unwind itself if Google goes public and the IPO markets go crazy."

MBAs looking at work in private equity should consider not only the cyclical state of the industry but the individual strengths of firms within it. "The industry is maturing; it's changing," Coulter said. There are too many funds competing both for partners' dollars and for acquisition deals, according to Coulter. "With nearly 80 funds greater than $1 billion, the industry structure is unstable," he said. Even as pension funds and other savings pools pour more money into private equity funds, it likely will go to fewer players, he said.

Coulter said Texas Pacific Group's limited partners suggest they are likely to cut the number of funds they invest in. One limited partner told Coulter it had ties with 128 different funds. "These guys woke up and realized they had too many relationships," Coulter said. It therefore will become ever more important to consider the strategy and strength of individual funds, Coulter said. He noted that before investing, pension funds and others increasingly consider the structure of a firm—everything from decision-making and operations strength to compensation and continuity of personnel.

—Fred Rose