Apr 29, 2014, 9:44 PM ETConference Presentation, Panel

Treasure Hunters: Discovering Value in Volatile Markets

Average buyout multiples in 2013 exceeded 10x, surpassing the 2007 peak.
The high yield and loan universes combined for 2013 represented double the leverage volume of the 2007 peak.
The number of private equity General Partners (GPs) has tripled over the last decade, rising from ~500 to ~1,600.
Private equity's share of total public market capitalization grew from 1.5% in 2000 to 4% in 2012.
Approximately 20% to 30% of transactions avoid traditional auctions, representing the primary "value sandbox" for distressed players.
Steven Toy identifies four specific non-auction opportunities: contrarian/out-of-favor industries, stressed/distressed businesses, complex carve-outs, and capital-starved businesses.

The domestic energy sector, specifically the "shale revolution," is identified as a primary area of undervalued opportunity.
The U.S. is projected to achieve energy self-sufficiency by 2020, with potential exports following shortly thereafter.
Municipal revenue streams in states like Texas and Oklahoma are being bolstered by the shale boom, contributing to Texas achieving a Triple-A rating.
Loop Capital observes record-low office vacancy rates in Pittsburgh, directly correlated with proximity to the Marcellus Shale Basin.
Investment opportunities in the energy ecosystem include shipping (LNG, LPG, coal transport), infrastructure (pipelines, roads, bridges), and ancillary commercial real estate (REITs) in energy-rich states (TX, ND, PA, OH).
Tad Revell notes that while Texas is well-priced, Oklahoma, California (post-environmental issues), New York, West Virginia, and Utah represent underappreciated upside.

Steve Shapiro characterizes the current credit environment as "mid-to-late cycle," noting a resurgence of risky lending structures (HoldCos, dividend deals, pick-to-lends).
Vivarte and Aeroports de Montréal are cited as examples of assets experiencing rapid price devaluation (30-35 points) following missed earnings.
The "Yellow Pages" model is utilized as a strategy for "cigar butt" businesses transitioning to digital, where management can extend cash runway.
European banks and CLOs are identified as "unnatural holders" forced to sell structured credit and reorganization equity at attractive prices.
A forward-looking view predicts a significant distressed opportunity in 12-24 months, with potentially $50 billion+ of paper trading between 75 and 85 cents on the dollar.
Golden Tree is raising a dedicated distressed fund ($750M–$1B) with a four-year investment horizon to capture middle-market opportunities ($20M–$40M deals).
Average leverage in new buyout deals is cited at 6.5x to 7x, creating vulnerability if interest rates rise.
Golden Tree holds high cash levels in their master fund to prepare for anticipated market volatility.

Tad Revell positions the market in the "latter stages" of the business and credit cycle, citing stretched valuations and compressed risk premiums.
Current high-yield spreads (~375-380 bps) offer only ~30 bps of expected return after accounting for ~3.5% expected loss based on 5% default rates.
Floating-rate loans are preferred over high-yield bonds due to senior secured status and 160-170 bps spreads versus the low net yield of bonds.
A "wall of maturities" of $1.7 trillion in debt is scheduled to fall due between 2017 and 2020.
Non-agency mortgage securities are viewed as undervalued, trading below investment grade despite having significant credit enhancement and 5.5% yields.
The "Fed Put" and zero-interest-rate policy are described as distorting asset valuations, creating a condition of "asymmetric risk" where downside potential exceeds upside.
Jonathan Seaford notes that 65% of a typical capital stack (at 10x EBITDA with 6.5x leverage) is exposed to interest rate volatility.

Leonard Green avoids highly leveraged software and business service deals where equity is priced like stable bonds, preferring to wait for higher valuations to normalize.
The consensus among panelists is that "plain vanilla" high yield is unattractive, but structured private equity deals (non-public, $250M–$500M range) offer superior terms and pricing power.
James Reynolds warns that ETFs and mutual funds forced to buy size are inflating prices in investment-grade and high-yield markets, creating a potential bubble.
The panel recommends that GPs raise "Washington capital" (long-duration, 10-year locked funds) immediately to capitalize on future dislocations.
Steven Toy anticipates looking back at current record valuations and instruments like "Covenant Light" deals as a "déjà vu" of pre-crisis excesses.
Tad Revell identifies the Federal Reserve's dialogue and minutes as the primary signal to watch, with the "Taper Tantrum" serving as a precursor to current market instability.
The panelists agree that the next major investing opportunity will emerge from a combination of rising rates, default events, and the subsequent distress in paper trading at 88-90 cents on the dollar.