- Q3: PE-backed M&A totaled ~496, representing ~$82 bln of value
- Quality assets command mid-teen multiples of Ebitda; 20x to 25x Ebitda multiple are no longer outliers
- Sellers possess new level of aggression; buyers concentrate on specialization, add-on M&A, creativity
It’s a good time to be a seller in private equity.
A decade into the recovery, capital continues to flood into the market and GPs are pulling out all the stops for top-tier companies.
“It’s no secret that prices have increased for several years now,” said Trevor Rich, a partner in the Los Angeles office of Lovell Minnick Partners. “It’s a competitive environment. There are buyers out there that are willing to bid up and pay top dollar for assets right now.”
Competition at every level of the market is up notably, driven principally by the amount of capital coming into the industry relative to deal count, which is pretty static, said Andrew Olinick, partner and co-head of 3i Group’s North America private equity team.
“Notwithstanding whatever potential shock comes,” he said, “the market seems to move right past it.”
And while leverage ratios are near 2007 levels, deal multiples are higher, so equity contributions are higher, said Olinick. “I don’t think growth is higher, and so I think a lot of sponsors are underwriting lower returns.”
“It’s hard to achieve an above-market growth rate without add-on acquisitions when we’re in a 3 percent GDP market,” added Gretchen Perkins, a partner at Huron Capital Partners.
“We’re in a very strong period and we expect that to continue through 2019, barring any political or geopolitical actions that take us off course.”
Carlyle was behind one of the largest LBOs in Q3, striking a $6.7 billion deal for PE-backed Sedgwick Claims Management Services, the insurance-claims-services giant.
In an even larger buyout, investors CC Capital, Cannae Holdings and Thomas H. Lee Partners took data and analytics provider Dun & Bradstreet private in a transaction valued at $6.9 billion.
Deal count totaled 496 in Q3 through Sept. 17, with about $82 billion of disclosed value for those announced and closed, according to Thomson Reuters data. That compares with about 610 transactions and $132 billion of value in the year-earlier period.
While firms continue to navigate through today’s hypercompetitive market by averaging down higher deal multiples through add-on M&A strategies, sponsor behavior also indicates that buyers and sellers recognize the risk of the long economic recovery, added Robert Fullerton, global head of leveraged-finance investment banking at Jefferies.
For instance, Fullerton said he’s observed a slight bias toward defensive industries like industrials and healthcare. He’s also seeing more sponsor exits inside of two years: “There’s no question sponsors are starting to factor a [potential] recession into their businesses.”
Others agreed. “It seems like people are quicker to pull the trigger on a sale if they think they can get a good price,” said Fred Lim, a partner in Goodwin Procter’s PE group.
One cause for pause that’s seeping into diligence, sponsors suggested, is uncertainty around trade.
While at Huron deal flow is up 20 percent in 2018 through August, Perkins noted the challenging environment as it relates to the current administration’s stance on tariffs.
“This uncertainty has put a chill on PE firms investing in or acquiring businesses that do a significant amount of sourcing from China,” Perkins said.
“Given the fact a lot of companies are predicated on free, international exchange, I do think there is probably increasing risk that those [assets] could come under some sort of pressure,” Olinick agreed.
3i is also scrutinizing any business that depends on British or EU trade amid continued Brexit uncertainty, Olinick noted.
Buyer and seller tactics
Thanks to GPs’ immense appetite for quality assets, shortened hold periods don’t necessarily mean sellers are lowering expectations.
Olinick said that in Q3 he saw a few situations that signaled how frothy the market has become.
In a couple instances, firms launched auctions for assets with letters of intent for add-on transactions — and bidders were asked to give credit for those pending deals, he said. “Both seem to be getting done. That’s a sign of a new level of aggression.”
The confidence of intermediaries is also apparent.
In sharply competitive situations, bankers are more willing to let buyers drop out of processes earlier, Olinick added. That signals bankers have a higher conviction that a given business is going to command a certain deal multiple or price.
“For the trophy assets, there are just so many bidders that things will get done,” Olinick said.
Because winning assets are harder and harder to come by, sponsors with good portfolio companies — particularly those with aggressive M&A strategies — are increasingly looking to roll over minority equity stakes when a new controlling PE partner is brought in, Olinick added.
“If you have a successful company, why would you want to take all your money off the table?” Olinick said. Firms “are almost thinking like a family office.”
At the same time, the lender community appears a bit more sensitive to the adjustments to earnings that bankers are pitching, focusing a little more on underlying Ebitda, Olinick said.
“It signals that lenders are becoming a little more discerning on businesses that could cycle down and are looking through a little more of a pessimistic lens,” Olinick said.
10 largest announced and pending deals by U.S. Sponsors, Q3 2018
2008-2018 pending and closed deal number and disclosed deal volume, in billions
The most active LBO dealmakers of Q3 2018
Top 10 U.S. sponsor deals closed in Q3 2018
U.S.-based disclosed deal value for closed deals by quarter, in billions