Private equity: Searching for strategies
Private equity deal activity was under pressure in the first half of the year, as the high yield debt market went into a tailspin and banks hesitated to support leveraged buyouts. “For a good portion of the first and early second quarter, there was almost no debt available,” says Oliver Brahmst, a partner at White & Case. “As a consequence, the beginning of this year saw a pretty big drop in activity.” The number of private equity buyouts declined 8.4 percent in H1 2016 year-on-year, though deal values increased slightly from US$62.8 billion to US$74.3 billion. The decline in private equity exits was slightly less pronounced, with just 423 deals in the first half of 2016, compared with 448 during the same period in 2015. However, exit values dropped 11 percent to US$99.7 billion. In terms of sectors, there is still appetite for PE deals in areas such as PMB and TMT. The biggest first-quarter exit involved computer services group Dell’s acquisition by NTT DATA Corp. for US$3.1 billion. In another large H1 2016 deal with a PE component, medical supplies maker Sage Products was sold in February by PE firm Madison Dearborn Partners to medical technology company Stryker Corp. for US$2.78 billion.
On the medical tech convergence side, US healthcare IT firm Truven Health Analytics was acquired by IBM in February for US$2.6 billion from New York–based private equity firm Veritas Capital, which bought Truven in 2012 for US$1.3 billion. Demographics in the US support investment in healthcare. As a percentage of GDP, US citizens continue to spend more money on healthcare and drug development than most other countries, and PE firms are paying attention. “These are very attractive deals to any investor, but private equity especially has got into the software and tech sectors in a big way in the past couple of years,” says Brahmst. “The reasons are fairly obvious—this approach gives them a good fallback, it’s scalable and there’s not much capital expenditure.”
“You’ll see more PE firms and hedge funds broadening their offering, and there’s certainly plenty of money out there that is getting invested in all levels of the capital structure, whether in healthy or distressed assets,” says Brahmst. He points out that many large PE firms have morphed into alternative-asset managers, owning distressed funds and diversifying across the capital structure. “You need the strategy and you need the management team,” he says. “Take software: It’s much cheaper than running an airline, there’s no capital expenditure and it’s extremely scalable.”
A new way for PE deals?Despite the slowdown in activity and the temporarily weaker debt markets, money continues to migrate into PE deals. Successful managers are figuring out how to make money not just by being leveraged. Debt is less pivotal to deal success these days. “We have clients who just co-invest in minority stakes, and we have clients who invest more equity than debt because they understand how they can grow the company by increasing profits and maybe even increasing the multiples,” says Brahmst. “They see valuation and multiples increases on the horizon both on an industry and company level.” A higher level of PE-backed M&A can be expected, reflecting a desire to find new ways to make deals work. Simply taking control of investments and leveraging the company with debt is proving less effective. The large club deals that used to dominate in PE are unlikely to come back anytime soon, with less appetite to team up than before. However, a different form of club deal—described as “quasi club”—could be emerging. “We are now involved in large transactions where the seller is going to roll over some of its equity into the new deal, so it becomes a club deal,” says Brahmst. “There is a significant amount of equity, but the buyer recognizes it can’t write the entire equity check by itself, so it is prepared to roll over some of its investment. The seller, on the other hand, wants to take some money off the table, but it still wants to ride the upside. “Some non-US funds that have only previously dipped their toes in the US market have done deals where the seller has rolled over, and that has given them some confidence. They become a team, with the roll-over seller bringing their historical expertise and knowledge of the company and the US domestic market into the boardroom. “That gives, for example, a London-based PE buyer much more confidence that they can understand and be successful in the US market,” says Brahmst. While there remains challenges on the horizon, Brahmst argues, the outlook remains good: “From a personal perspective, I’m as busy as ever. Maybe that’s anecdotal, maybe I’m just lucky, but I’m seeing a lot of activity in a lot of different sectors.”
Tech talkThe tech sector’s appeal in general is obvious, with the US remaining a global leader in the field. PE clients have determined a way for PE to play a role after a tech company leaves the venture capital space and before it chooses to go public. Rather than buying it in a private sale, private equity can take it to the next level. For example, the biggest PE-linked deal in the first half of 2016—one of the largest leveraged buyouts in recent years—saw PE firm Apollo buy out home security systems manufacturer ADT and merge it with security specialist Protection 1, in a deal valued at US$15 billion, including debt.
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▪ The volume of private equity buyouts dropped 8.4 percent in H1 2016 year-on-year ▪ Deal values increased from US$62.8 billion to US$74.3 billion ▪ Private equity exits were down 5.6 percent in in H1 2016 year-on-year
Exit values dropped 11 percent to US$99.7 billion