There has perhaps never been a better time to sell a portfolio company for US private equity (PE) firms. Since the beginning of 2013, the volume and value of buyout-backed exits has climbed sharply, allowing PE firms to exit businesses for high valuations and strong returns.
In Q2 2013, US PE firms sold 158 companies worth US$36.7 billion. By contrast, the second quarter of 2014 saw the industry reap 241 exits worth US$83.7 billion—an increase in value of 128 percent. Indeed, when compared with the asset class’s Q1 2009 performance, when only 76 exits worth US$5 billion closed, Q2 2014 value was 16 times higher. This demonstrates how strongly PE has rebounded since the credit crisis.
“Valuations and contract terms favor the selling sponsor in today’s market much more than over the past number of years. As a result, sponsor hold periods are shortening to take advantage of the favorable market,” says White & Case M&A partner Carolyn Vardi.
A number of factors are driving this dynamic. Stronger portfolio company performance, the return of well-funded strategic buyers to M&A markets, increasing competition between PE firms in the mid-market and readily available debt financing have combined to drive the strong run of exits.
Matthew Kautz, White & Case M&A partner, says many buyout firms that held onto portfolio companies through the downturn when deal activity and valuations slumped—are now bringing these assets to market.
“There were a number of portfolio companies that were unable to thrive during the period between 2008 and 2011, even though they didn’t really have any fundamental issues,” Kautz says. “PE firms, especially those in the mid-market, have seen performance spike up significantly since then. These companies are now primed for exit, and buyout firms are ready to sell.”
The return of cash-rich corporates to M&A markets has created an increased appetite for these PE-owned assets. According to figures from the US Federal Reserve, non-financial US businesses have been sitting on more than $1.8 trillion in liquid securities.
And this year, corporates have started to invest these cash war chests, with PE portfolios being an important source of deals.
PE firms sold 284 companies worth US$105.7 billion to corporates in H1 2014, up from 215 deals worth US$42.9 billion in H1 2013.
“Corporates are back in the middle market. They have cash at their disposal, they are more confident in the economy and their shareholders want them to start growing their businesses again,” Vardi says.
Corporate buyers haven’t been the only game in town for sellers. An increasing number of PE firms are bidding for deals as well. There were 115 secondary buyouts (PE-to-PE deals) in H1 2014 worth US$41.5 billion, up from 79 exits to other PE firms worth US$8.1 billion in H1 2013.
Cash piles up, bargains down
Buyout houses are being put off by optimistic valuations, yet increased capital is putting pressure on PE firms to spend.
Strong exit and debt markets have had an impact on new buyout deals. Last year saw the highest values for buyouts for the past five years, and this trend is set to continue with deal values for H1 2014 higher than any other half-yearly figure with the exception of 2013.
In terms of deal volumes, there were 400 PE buyouts (worth US$77.3 billion) in the first half of 2014—beating the 338 buyouts in H1 2013. The largest PE deal in the United States for 2014 so far saw the Blackstone Group purchase US-based engineering firm The Gates Corporation for US$5.4 billion from Canada’s Pension Plan Investment Board and Onex Corporation.
These continued high valuations are driving fears that competition is bidding up prices too much. “PE firms are doing very well from exits and it is good for the PE model to have debt markets that are functioning again, but it is a double-edged sword. Auctions are very competitive and there are concerns that valuations are too frothy,” says White & Case partner Oliver Brahmst.