(Bloomberg) — The world’s private equity firms have cash to burn. First, they want to earn.
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Buyout houses from Thoma Bravo to Permira are putting portfolio company sales high on the agenda for early 2024, as the industry seeks to return money to investors after a challenging period for exiting holdings.
“There is certainly more talk, more conversations, with the realization that firms need to sell assets,” said Holden Spaht, managing partner at Thoma Bravo. “If you want to get a deal done in the first half, you had better be starting conversations with buyers in February.”
The value of private equity firms’ sales as a percentage of their spending dropped below 40% in each of the last three years, data compiled by Bloomberg show. That hadn’t previously been the case since 2009 and highlights how falling valuations and tighter credit markets have forced firms to keep assets for longer than typical five-year investment cycles.
This slowdown in sales has negatively impacted firms’ ability to raise money from investors, which have become reluctant to commit to new funds before seeing returns from previous vehicles.
“Private equity players have to face reality at some point,” said Per Franzen, head of private capital for Europe and North America at EQT AB. “They need to invest remaining capital and go back to the market to raise new funds, which means a need to drive exits and improve distributions.”
There are already signs that some big exits are being planned. Bloomberg News reported this month that Hellman & Friedman is weighing a potential sale of energy data platform Enverus at $5 billion or more, and PAI Partners is exploring options for an ice cream joint venture with Nestle SA that could carry a price tag of about $10 billion.
Line item one on the agenda at many investment committee meetings is timing. In a year in which roughly 41% of the world’s population will head to the polls, private equity firms are gaming out scenarios that would see them do much of their selling before the summer, in a bid to get ahead of any market jitters stemming from November’s US presidential election.
“The first half is going to be crazy busy,” said John Coyle, partner and head of the New York office at Permira. “There is a really big queue of companies that are lining up in sponsor land to be sold. Some proportion of it is provisional in that people are not saying we’ll hit the market straight away, it’s more that we need to get ready.”
Some dealmakers claim the impact of elections on mergers and acquisitions is minimal. While global deal values fell in four of the last five US presidential election years, according to Bloomberg-compiled data, one of those periods included the global financial crisis and another the Covid-19 pandemic.
Shock events aside, markets are quick to price in potential election outcomes, according to Isobel van Daesdonk, senior managing director in the financial sponsors group at Guggenheim Securities. “While the short-term uncertainty of elections may factor into the thinking of investors, it doesn’t change the fundamentals behind decisions around dealmaking.”
Price Points
Private equity dealmakers are also betting that the push to return cash to investors will result in less of a fixation on selling assets at prices of yesteryear. And on the buyer side, banks’ willingness to return to lending on larger transactions should help get deals across the line, they say.
“Buyer and seller expectations are now starting to meet after experiencing a gap post the 2022 valuation reset, as the public markets have traded up and as banks are in a stronger position to lend,” said David Humphrey, co-head of the North American private equity business at Bain Capital.
Other private equity-owned assets that could be sold in multibillion-dollar deals this year include KKR & Co.-backed European car park operator Q-Park and Carlyle Group Inc.’s luxury-watch parts maker Acrotec Group, both of which carry potential valuations of more than $4 billion.
Permira’s Coyle shares optimism that buyers and sellers can intersect on price. “The sentiment as a whole is more biased today towards doing something — not just buying, but selling,” according to Coyle, who said that parties were last year more inclined to dig their heels in over price.
Taking Stock
To be sure, private equity firms are also itching to start spending the roughly $1.4 trillion of dry powder sitting in their vaults. Buyout activity slumped over the last 18 months amid higher financing costs, with the value of take-private transactions down around 40% in 2023 — notwithstanding major transactions like Blackstone Inc. and Permira’s €14 billion ($15.2 billion) bid for online classifieds group Adevinta ASA and Silver Lake Management and Canada Pension Plan Investment Board’s planned $12.5 billion acquisition of Qualtrics International Inc.
One firm expecting to be busy with take-private deals is tech specialist Thoma Bravo, which in recent months has agreed to acquisitions of Frankfurt-listed compliance services firm EQS Group AG and New York-listed health-records software company NextGen Healthcare Inc. “We’ve done take-privates through all cycles and environments,” said Thoma Bravo’s Spaht. “There aren’t many parties willing and able to support the amount of margin improvement that we are.”
EQT, meanwhile, is looking at listed companies in Europe and the UK, where it sees markets continuing to trade at a big discount to other parts of the world. Veterinary pharmaceuticals firm Dechra Pharmaceuticals Plc, which EQT agreed to buy for around £4.5 billion ($5.7 billion) last year, “is a good example of the type of business we’re looking for,” private capital head Franzen said.
But with public equities rallying and the cost of borrowing still elevated, the art of playing smart when it comes to premiums — and potential returns — has become more difficult.
“We, private equity, do have a challenge in proving big take-privates make for good exits,” said Permira’s Coyle. “If you are buying a market leader, but they are misunderstood and/or underappreciated, which is the rationale for taking them private, what is going to change when you are ready to exit?”
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