A Blackstone View on the Next Wave of Buyouts

Joe Baratta is preparing for a new world.

The global head of private equity at Blackstone Inc. spelled out the conundrum he and the entire buyout industry is faced with: Financing is getting more expensive, the economy is choppy and valuations have tumbled -- even though the latter is typically a great condition for takeovers.

For high quality businesses, “we’ll be willing to over-equitize things to see us through these difficult financing markets,” Baratta told me and colleagues in a Bloomberg Television interview. “We want to avoid things where purchases turn on financing -- automobiles and home improvement, and those sorts of things.”

There’s also a big roadblock in leveraged finance markets that’s broadly putting dealmakers on edge. Banks could face sizable losses tied to a takeover of Citrix, Bloomberg has reported, while the Elon Musk agreement to buy Twitter could spur hundreds of millions worth of mark downs for lenders.

Baratta said he believes Blackstone has its own edge with lenders given its scale and track record of not losing loan investors money.

“The loan markets are tight, and they’re not really open right now.

Although for conservatively structured and properly priced transactions for great companies, I believe we’ll have access to capital. I think Blackstone’s particularly well suited.”

Yet terms are likely to change on financing deals across the industry. “The attention we pay to those terms is going to be really important,” Baratta said. “We may need to live -- and probably will need to live with -- worse terms than maybe we financed on a year ago, and the year before that.”

For future deals, Baratta’s team is spending a lot of time in public markets with large corporations. He said the deals will be “more highly structured, they’re going to be more bespoke.” He explained that firms that bought companies two years ago are unlikely to sell assets given the market downturn, meaning supply of new takeover targets in private markets is low.

“The auctions with 20 guys showing up competing against each other with stapled financing I think is a thing of the past, at least for now,” he said.

More on Wall Street

• How Thoma Bravo wins big buyouts: Don’t miss the latest deals newsletter by Bloomberg’s Michelle Davis. She speaks with a partner at the buyout firm who helped with some of the biggest deals in recent years.
• Wild, wild week at Credit Suisse. Don’t miss the walk through every detail by my colleagues.
• The Twitter takeover is “pending receipt” of the debt financing proceeds, according to Musk’s lawyers in an SEC letter. It’s typically hard to get out of financing such deals.
• Bloomberg’s Katherine Burton and Tom Maloney take a look at Steve Cohen’s means of playing Moneyball (a favorite movie, by the way).
• Some hedge funds had big, big gains in a year when the industry is generally slumping. Here’s a look at Citadel’s returns, Odey’s surge, BlueCrest’s gains and Haidar’s best year ever. AQR is also continuing its rally.
• Canyon’s Todd Lemkin tells Bloomberg Intelligence that he loves hung bridge loans. Here’s why.
• A new day at Bridgewater. Ray Dalio described to Bloomberg’s Erik Schatzker how he’s handing off the reins, for good.

Next week is a really big one. On Tuesday morning, I’ll be at the Greenwich Economic Forum interviewing Apollo’s Co-President Jim Zelter and XPO’s Brad Jacobs, who told me this economy “has some possibility to be worse than the great financial crisis, given all the geopolitical risks and other issues at play.”

On Wednesday, please join us for Bloomberg’s Invest conference. Thursday, I’ll be broadcasting from Washington, D.C. where Jamie Dimon will be speaking at the Institute of International Finance. Friday, US banks are reporting earnings, and we’ll bring you the analysis live on Bloomberg Television starting from 5:00 a.m. Eastern. Send all tips, ideas and opinions over to [email protected]. Thrilled to take on the busy week ahead.