Competitive market triggers changes in PE auctions

As demand for quality assets continues to outweigh supply, a hypercompetitive market is also changing the way sponsors are buying and selling companies.

“There’s a lot of focus and conversation around how to best navigate processes and how to best differentiate yourself in an auction, and that sometimes separates winners and losers today,” said Michael Weisser, who as a partner at Kirkland & Ellis represents sponsors and their portfolio companies.

“Also, the market is super-competitive, so you are seeing sponsors more carefully picking their battles as they can’t go all in on every situation,” Weisser added.

Competition is growing as GPs increasingly vie for deals with non-traditional buyers including family offices, LP direct investments and pension funds. At the same time, the U.S. PE industry is expected to raise more capital than in any year since the global financial crisis, meaning piles of cash are sitting on the sidelines that sponsors are eager to put to work.

‘Disrupting auctions’

“When you invite people to an auction — as people develop strategies to accommodate high-multiple environments — some of those strategies involve disrupting auctions by taking assets off the table before the auctions reach their natural conclusion,” added Justin Abelow, managing director of Houlihan Lokey’s financial-sponsors group.

Healthcare, where assets of scale remain hard to come by, is one industry in which private equity groups are courting companies early on, getting a head start on their diligence ahead of a sales process.

For example, TPG Capital’s Mediware Information Systems earlier this year launched a bid for Kinnser Software before the William Blair-run auction for home-health-software company had fully gotten under way, Buyouts reported at the time.

Similarly, Harvest Partners moved quickly to shut down an anticipated auction for Varsity Healthcare Partners’ EyeCare Services Partners after the company tapped Jefferies, sources previously said.

The increasing occurrence of preempted and tightly run processes has created tremendous seller demand for counterparty knowledge, Abelow said.

For intermediaries, Abelow said that means making sure data rooms are stocked with the right information, with more analytics and modeling being made available to buyers to help them understand businesses earlier.

It’s also increasingly common for sellers of middle-market and upper market assets to hire two or three banks to ensure processes are sophisticated enough to support preemptive bids, he said.

“Once upon a time, several years ago, sellers didn’t really care who the buyer was,” Abelow said. “Now there’s a growing understanding that these firms are very, very different and their investment strategies are very, very different.”

Three scenarios

Weisser described three different preemptive-like scenarios he’s advised on over the past three months.

In one instance, the client submitted a bid ahead of the actual bid deadline and successfully preempted the deal, Weisser said.

While the first scenario is akin to the way in which TPG’s Mediware ensured its victory for Kinnser, selling PE firms in other cases are less willing to avoid auctions.

In another scenario, the buyer wanted to preempt but the seller wouldn’t allow it, and the client was forced to participate in the auction, Weisser said.

In the third scenario, Weisser described it as a “VIP” auction. In a VIP auction, the seller doesn’t allow a preemptive bid, but provides a select group of parties access to management and the data room ahead of a formal auction. If that doesn’t produce a deal, a broader auction is launched.

Narrowly casting an asset to a smaller group of parties may make sense if there’s two or three extremely obvious or logical buyers.

These VIP processes were very popular five or six years ago, mostly in the public-company space, and are becoming increasingly common in PE, Weisser said.

Still, the danger of VIP or gold-card processes, Abelow cautioned, is that they don’t always sit well with the second-tier sponsors that were left out.

Action Item: Reach out to Houlihan’s Justin Abelow at +1 212-497-4206

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