Wednesday, April 1, 2009

CPPIB picks up its socks and gets vindication

The Canadian Pension Plan Investment Board (CPPIB) has had some unfortunate luck when it came to making acquisitions. They were constantly outbid by rivals who applied higher levels of leverage to out bid them in LBO's. But we all know how that story ends for many of the firms out there who had too much leverage and now find themselves in deep trouble.

Well now might be CPPIB's vindication, as they start to pick up heavily discounted acquisitions which passed them by the first time around. The article cites the deal to acquire Macquarie Communications Infrastructure as a case in point. While Macquarie had gotten the better of CPPIB at the time, it appears that the tables have turned: even though CPPIB's bid assumes a relatively low valuation, it is still endorsed by the Macquarie board. While investors may reject the offer, a better question is: "Who do you expect to step in to up the price?"

I guess there is some truth in the old adage that some of the best deals are the ones that aren't made.

Timing is everything it seems and, as I've been reiterating, the PE winners in today's markets are the ones who don't have to liquidate prematurely (taking unexpected losses) and who have cash to make purchases (to realize future gains).


Anonymous said...

Remember also that "losing" a bunch of bids doesn't make you a loser; it might make the winning bidder the loser, because it might just mean that they overpaid.

Losing bids *might* mean that your valuation of the company is off, or that your ability to improve the profitability of the potential target asset is lower than that of your rivals... but it might ALSO mean that your rival bidders are just willing to accept a lower IRR from the asset.

If you demand a 20% IRR from assets you're buying, and your bidding opponents will be satisfied with a 15% IRR on the same asset, then even assuming an identical valuation of the asset, it just means that they can afford to pay a lot more for the same thing than you can because they're buying it with a lower return expectation than you.

-Done Exams!-

Joshua Wong said...

I think you also made a terrific comment when we last spoke about understanding the nature of private equity exit multiples and returns on different asset classes.

Yeah, it's technically a private equity deal, however, there are some pervasive characteristics based on the nature of the business (infrastructure) such that you can only expect a certain IRR.

Congratulations on finishing your exams! Good luck on your interviews and don't forget us poor people when you're rich! :)