Club deals may not be as popular as they once were, but private equity still uses them to buy assets and that might not be a bad thing, according to PitchBook.
The ballooning of buyout-fund sizes means PE firms rely less on club deals to acquire large companies, PitchBook said. Club deals, where two or more sponsors buy an asset, usually something very expensive, have reemerged of late.
Consider Nielsen. Blackstone and Hellman & Friedman are leading a group that is exploring a bid to buy the TV-ratings provider, the Financial Times reported Oct. 10. Nielsen could sell for $17 billion, the story said. (Nielsen was taken private by a group of PE firms in another club deal in 2006.)
Club deals tend to go out of business or file for bankruptcy less frequently than sole-sponsor buyouts, PitchBook said in its report “3Q U.S. PE Breakdown.” From 2008 to Q3 2018, club deals failed 8.9 percent of the time compared with 11.1 percent for sole-sponsor buyouts, the data provider said.
Club deals represent 39.4 percent of the U.S. non-add-on leveraged buyouts, valued at $1 billion-plus. These transactions have attracted negative publicity mainly due to the flameout of some high-profile assets. The most notorious is Toys “R” Us. The retailer, owned by KKR, Bain Capital and Vornado Realty Trust, collapsed under its $5 billion debt load and filed for bankruptcy in 2017.
Club deals also undertake nearly twice the number of recapitalizations, where PE firms are paid out in dividends, compared to sole-sponsor buyouts, PitchBook said. The practice leaves companies less financially viable going forward, critics claim. Still, PitchBook is positive on the practice.
“Quite a few high-profile [club deals] have failed and they’ve gotten an inordinate amount of negative attention,” said Wylie Fernyhough, a Pitchbook analyst and author of the report. “But they seem to perform better and fail less often. They might not be as bad as the public might lead you to believe.”
The M&A market may be surging, but buyout multiples are dropping, PitchBook said. Companies are selling for a median multiple of 11.9x year-to-date, a dip from 2017’s figure of 12.1x, the data firm said.
Larger buyouts, by comparison, tend to go for higher multiples. PitchBook pointed to the $6.9 billion take private of Dun & Bradstreet, which sold for 12.4x. Asked about the decline in multiples, Dylan Cox, a PitchBook senior analyst for PE, emphasized that the market remains expensive.
“Buyout multiples continue to be elevated but there are some quarter-to-quarter fluctuations,” he said.
Even though PE firms have $1 trillion in buying power, they are still at a disadvantage to cash-rich strategics.
How much strategics have in total is unclear. Some big-name tech players, like Apple, which had a $256 billion war chest in 2017, can easily outgun PE. To make this worse? Strategics received an additional windfall from the recent corporate-tax cuts, PitchBook said.
There may be some hope for PE. Buyout funds have grown larger in the current boom time for private equity. Q3 saw 51 funds close on a total of $57.4 billion. A pair of megafunds accounted for 43.2 percent of all funds raised in the quarter.
Carlyle Group held a final close on its $18.5 billion flagship fund, while Insight Venture Partners X collected $6.3 billion. Vista Equity Partners and TPG are each trying to raise $10 billion or more funds.
To boost returns, PE firms continue to use add-ons. This year has seen 1,665 add-on transactions, representing nearly two-thirds, about 66 percent, of buyouts. This is up from 60 percent for all of 2017.
IPOs in 2018 have emerged as a popular exit for PE firms. Twelve companies went public in the third quarter, compared with seven for the same period in 2017. Overall, PE has produced 39 IPOs so far this year, PitchBook said. The largest IPO of the quarter came from Cushman & Wakefield, which raised $765 million.
Size does matter in private equity M&A. It’s easier to take a large portfolio company public than it is to find a buyer, said Cox.
“As you move up the scale, there are fewer potential acquirers for that large portfolio company,” he said.
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