At a time when dealflow has been depressed to decade lows, private equity has taken to pursuing fresh deals in a place it has historically tapped for exits: public markets. 

For the first time in at least a decade, the number of companies going public versus being taken private is nearly even. Europe has seen a record year of take-privates in 2023, with 53 in motion to date, according to Mergermarket data – just shy of the 57 public listings seen in the continent’s sleepy IPO market. 

Further de-listings, particularly in the orphaned small- and mid-cap spaces, are expected to feed otherwise weak pipelines into a bearish second half of 2023. Valuation mismatches in private equity has seen wider deployment levels at their lowest since 2009, according to Unquote Data. 

Corporates have been active and will continue to play in the public-to-private (P2P) space, accounting for around 40% of take-privates completed in the year-to-date, especially in the fintech space, such as Deutsche Borse’s [ETR:DB1] USD 4.3bn offer for Simcorp. However, they are not burdened by the same deployment pressures as their private equity counterparts.

Much sponsor involvement in the space is driven by an increasing need to deploy dry powder in a market expected to feed well-performing vintages and probable valuation discounts to listed companies. 

“A lot of private equity is in fundraising mode,” said Arnaud Coibion, a partner at Linklaters. “They were quieter for one or two quarters, but need to show their limited partners (LPs) that they’re putting the money to good use.” 

Many buyers have “got tired of waiting”, Coibion noted, adding that sentiment has changed in the past few weeks, with a lot of private equity funds keen to put vast piles of dry powder to work. 

This PE demand is evidenced by the likes of Archimed, Triton and Advent International actively scouting the market, as well as activist investors like Gatemore increasingly seeing their involvement as a precursor to a sponsor-backed de-listing. 

Small victories 

Headline-grabbing deals have mostly come from large-cap take-privates, including EQT [STO:EQT] and ADIA’s GBP 4.9bn take-private of veterinary pharmaceuticals group Dechra [LON:DPH], marking a 40% premium to its six-month weighted average. Meanwhile, Silver Lake’s EUR 2.6bn bid for London-based Software AG [ETR:SOW] represented a 57.5% premium to its three-month weighted average. 

However, more activity is being seen in the lower end of the market, as the average deal value stands at USD 685m, half of that from the year prior. 

“The orphaned mid-cap is trading at a severe discount,” said the managing partner at one large tech-focused fund, pointing out that, although the FTSE 250 and S&P 500 are trading flat and up, respectively, much of this growth is coming from the top-10 companies. 

“These smaller companies showcase more sensitivity to macroeconomic headwinds, interest rates and lower trading volumes,” they said. “When you look at the overall index, it’s too expensive, but under the covers, there are some interesting companies to take advantage of.”  

Sponsors have been capitalising on this, as private market auctions continue to collide with pricing disputes.

“For some listed companies, particularly in the small- and mid-cap spaces, the investor base is largely retail, with few institutional investors,” said Raphael Bidaut, a director within Bryan, Garnier’s healthcare team. “This, alongside a lack of analysts covering the companies, often means that a company is wrongly priced in public markets. Private equity knows this, and can price accordingly in take-privates.” 

Recent activity in the space includes IK Partners’ GBP 269m takeover of UK-based teleradiology group Medica [LSE:MGP], priced at roughly a 50% premium to its six-month weighted average and recommended by its directors “at a value that reflects the future growth potential of the business”.

The number of large-cap take-privates is also expected to increase once leveraged finance markets re-open fully, said Sonica Tolani, a partner in  White & Case’s M&A practice. SUSE [ETR:SUSE], with a current market cap of EUR 2.38bn and EQT [STO:EQT] as its largest shareholder, continues to be a prime target. 

A number of other companies, including Trainline [LON:TRN] and Nexi [BIT:NEXI], are also trading underwater and have found themselves in the cross-hairs of buyout groups. 

For now, sponsors are looking at creative financing solutions, including early equity syndication with co-investors, notably sovereign wealth funds, said Matthias Kiesewetter, a Hamburg-based partner in the same team at White & Case.  

Some alternative financing solutions also present advantages for the vendor. The decision to accept a cash bid is often a binary one, but many are increasingly seeing opportunities to roll some investment into the buyer, said Tolani.

Pass the parcel

Some sponsors are also exploring take-privates of companies listed from their own portfolios at the height of the market. These include Cinven’s non-binding offer for medical diagnostics group Synlab [ETR:SYAB], at a 45% premium on its last day of trading before it confirmed discussions. This is also a solution touted for EQT and SUSE, as reported.

However, these kinds of deals will be very situation-specific, depending on whether a company is a poorly performing investment versus an undervalued asset. 

“It might be that the business needs more fundamental strategic investment,” said Chris Boycott, a partner at Linklaters. “To take an underperforming asset out of the market, you have to think twice as a sponsor. You need a clear view of the amount of investment and time required before you can exit again.”

Given the current state of the IPO market, and the likes of the London Stock Exchange struggling to win new listings – with WE Soda being its latest victim – the debate has now shifted to whether public or private ownership is more attractive. 

“The bigger shift than ‘which exchange to list on’ is that it’s often more attractive to have a sponsor-backed capital structure that leaves you outside of public-company reporting requirements, plus quicker access to capital,” said Boycott.