Corporate Financing Analysis - PE Buyouts Struggling To Compete With Strategic Acquirers - 15 MAY 2017
With the global M&A arena finding a firm and consistent footing during Q117, it has made conditions for private equity buyouts more complicated due to the heightened level of competition for deals. With strategic acquirers flush with cash secured by the opening up of avenues for cheap financing in the record low interest rate environment, we expect the buyout market to continue to struggle across the remainder of the year too. According to data provider Dealogic, global announced dealmaking reached a level of USD725.8bn across the first three months of the year, a level just 4% shy of the haul recorded during the first quarter of 2016. During the same time period, Preqin data show that just USD53.0bn worth of buyout deals were announced, a significant drop from the USD89.0bn in such deals announced during Q416. We note that this equates to the lowest three-month haul for such deals since back in Q112, with the only real deal of note being the USD4.8bn buyout of London-based insurance broker Aon C orporation's Employee Benefits Outsourcing Unit by PE industry giant The Blackstone Group, a deal completed on February 17. So, after enjoying a 'purple patch' for activity in 2016, deal levels have become far more muted at the start of this year, illustrating the difficulty fund managers are having in striking deals at the entry end of the PE investment cycle. A look at the geographic breakdown of announced buyout dealmaking shows that PE firms completed significantly more transactions in the North America market compared to those in Europe during Q117. Both regions recorded a similar aggregate value of investment, however, USD25.2bn and USD20.1bn respectively. Additionally, we note that four of the 10 largest deals of the first quarter were for European assets, as the region looked to rebound from a slowdown in H216, investor anxiety lingering on from 2016 began to settle and the political headwinds of last year were priced into the equation. We note that the Asian market also saw an uptick in buyout deal activity following an equally disappointing performance in the buyout market last year, with activity totalling USD7.0bn during Q117, surpassing three out of four quarters of 2016.
In our view, concerns over pricing are unlikely to subside anytime soon, much to the disappointment of fund managers looking to keep investors onside by putting unworked capital to use. Indeed, PitchBook data show that PE firms paid a median multiple of 10.8x EBIDTA (earnings before interest, taxes, depreciation, and amortisation) in Q117. While this generally great news for exits, the same cannot be said for buyouts ( see ' The Exit Window Is Now Open For PE Funds ' , March 15). When prices do start to come down, as they have to at some point, we highlight that PE funds will be well placed to announce buyout deals. After all, as Preqin data correct to the end of Q117 show, OE funds have a record amount of cash to the tune of USD842bn currently waiting to be deployed in investments. And if our below-consensus view on US growth (and interest rates) proves to be accurate then the wait may not be too long. Indeed, our Global team believes that policy under the Trump administration will disappoint, preventing a significant acceleration in economic activity. Without marked acceleration in real growth, we see little reason why the Federal Reserve should adopt a more aggressive pace of rate hikes, in line with our forecast for the benchmark rate to end the year at 1.00%. In turn, such underwhelming sentiment will pass onto equities and ultimately drag prices downwards from their current lofty multiples. The first Q117 estimates of US GDP growth certainly support this view; they came in at 0.7% q-o-q, below survey expectations of 1.0%. Until valuations do drop, however, Christopher Elvin, head of Private Equity Products at Preqin notes that 'managers will have to step up their efforts to find pockets of growth and opportunity on both a sector and a geographical level'. Such a high level of dry powder from a flurry of recent fundraising closes suggests to us that investors still have plenty of faith in the ability of the PE asset class to provide solid returns. However, unless such capital is put to work sometime soon, we may see a growing number of limited partners putting pressure on fund managers to make deals, even it means paying over the odds to do so.
|North America Still On Top|
|Q117 PE Buyouts By Region By Deal Value, USDbn|
|Source: Preqin , BMI|