A falling tide grounds most ships. While that is true of M&A broadly today, private equity is doing quite well, relatively speaking.
Buyouts of North American targets may be down from last year’s heady levels –– but they remain historically high. In the year to date, buyouts have hit USD 277.9bn. With three months of 2022 still to go, this year is already the second highest since private equity’s last peak in 2007, beaten only by last year’s record-setting USD 496bn in buyouts.
On one level that seems surprising, given interest rates have risen at their fastest clip since the early 1980s as the Federal Reserve grapples with stubbornly high inflation.
“Some PE firms lament about interest rates rising,” says one banker. “But many have big funds they have to deploy. In our conversations with PE firms most are remaining active and are looking at opportunities to acquire.”
At least nine PE funds were reportedly in the market over the summer raising funds targeting USD 20bn or more, including Blackstone, Hellman & Friedman and Clayton, Dubilier & Rice.
Tech favorite
The tech sector has long been a buyout favorite, but that is especially the case now that valuations of the tech-heavy NASDAQ are down 31.4% on the year. Buyouts in the tech sector accounted for 38.5% of all buyouts in 2022 YTD, up from 32.3% in the same period last year. Some of the biggest this year have been Citrix Systems, Anaplan, Zendesk, and Avalara. But with valuations down near 52-week lows, will strategics want to sell? Absent a juicy premium, strategics are likelier to offer sponsors the chance to invest in a PIPE, shorthand for private investment in public equity. The issuer can take some money, receives a validation of their valuation, and gains PE support going forward, says the banker. “We might see more of that.”
Going private
This year’s mega buyouts of Citrix, Anaplan, Zendesk, Nielsen Holdings, Avalara and Switch all involved PE firms taking publicly-listed companies private. Sponsor-led take-privates are at their highest level since private equity’s last Golden Age in 2006-7. In 2022 YTD, they have reached USD 140.3bn and look set to surpass 2021’s USD 151.4bn, but fall short of 2007’s USD 249.9bn. Financing risks have risen. How well banks offload the debt they underwrote for LBOs agreed before markets soured – such as Citrix and Nielsen – will act as a gauge to investor sentiment. If banks keep losses low, it will be a positive signal.
Exit delay
With stock market indexes having plummeted – the S&P 500 is down 23.4% on the year – PE firms are pausing their own exit strategies. In 2022 YTD, buyouts (USD 277.9bn) have outpaced exits (USD 222.7bn) by roughly 25%. In 2020 and 2021, as stock market valuations soared, exits outpaced buyouts. “Many PE-owned companies are reluctant to monetize in this environment. They will continue to operate portfolio companies, maybe do tuck-ins instead,” says the banker.
Secondaries
Secondary buyouts, in which a PE firm sells a portfolio company to another PE firm, is happening less this year, while sales to strategic players are more prevalent. In 2022 YTD, just 17% of all PE exits – USD 38.8bn – were secondary buyouts. The other 83% of exits – or USD 183.9bn – involved sales to strategics. From 2016 to 2021, secondaries took a much bigger slice of PE exits, ranging between 26% and 31%. One reason is strategics are currently looking to strengthen their offerings ahead of greater economic uncertainty.
