Private Equity’s Struggle to Spend It; Buyout Firms’ Biggest Challenge Next Year Could Be Finding Deals in a Crowded Market
January 3, 2014 Leave a comment
Private Equity’s Struggle to Spend It
Buyout Firms’ Biggest Challenge Next Year Could Be Finding Deals in a Crowded Market
RENÉE SCHULTES
Dec. 31, 2013 5:59 a.m. ET
Nothing says froth like an initial public offering for a ski-jacket maker that is 31 times oversubscribed by investors. Yet the pristine conditions that greeted Italy’s MonclerMOV.MI +7.12% when it slid onto the public markets in December had already supported a record $41.3 billion in other private equity-backed IPOs in Europe this year, according to Dealogic.That marks an important step toward the private-equity industry’s recovery. Getting out of investments means realizing returns and returning money to investors; that helps raising new funds. But another challenge lingers: how to navigate Europe’s crowded deal-making slopes without breaking a leg.
Deploying capital has grown more challenging. There have been fewer midsize carve-outs from bigger companies, a classic source of sponsors’ deals. Instead, some of the biggest deals of the year, like German publisher Springer Science+Business Media, were secondary buyouts. Overall, private-equity companies spent $69.50 billion on acquisitions in 2013, flat on last year and 37% of what the industry spent at the peak of the buyout boom in 2007, according to data provider Preqin.
With a smaller pool of quality assets, competition pushes valuations higher. Cash-rich corporates continue to go head-to-head with traditional buyout funds that are still sitting on $90.5 billion in unspent capital, estimates Preqin. As a result, European buyout multiples were an average 8.25 times historic earnings before interest, taxes, depreciation and amortization, down only a turn since the 2007 peak, notes S&P Capital IQ LCD.
So leverage is also rising. Take Nordic payment processing business Nets Group: Its bank owners are offering a debt package of 6.5 times leverage to sell it, in a complicated carve-out, according to two people familiar with the deal. But the industry can’t count on debt markets staying this benign. Yields on B-rated European corporate bonds—a proxy for buyout debt—have halved in the past two years to just 5.5%, according to the Bank of America Merrill Lynch high-yield bond index.
That puts a premium on firms that can hunt off-piste for investments where competition and valuations are lower. Deals like Altor Equity Partners and Bain Capital’s $1.1 billion buyout of Norwegian fish-feed company EWOS in July look smart. Seller Cermaq was fending off a hostile bid and needed a quick deal; the firms paid 7.5 times historic Ebitda, a discount to listed rivals.
Private equity needs to pick its route into new deals carefully.
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