Cash-rich private equity firms are pouring money into smaller transactions following the collapse of a string of big deals, with the total value of investments of $1bn or less surging to a record this year.
According to data provider Refinitiv, private equity buyouts and investments with a price tag below $500m are also at a record, and now account for more than 30 per cent of the industry’s dealmaking by value, the highest level in almost a decade.
Attention this year has focused on a handful of blockbuster transactions, such as Blackstone’s $18.7bn takeover of the US warehouses portfolio of Singapore-based GLP and EQT’s $10.1bn purchase of Nestle’s skincare unit. But several deals — including Apollo’s planned $15bn purchase of metals group Arconic — collapsed after months of negotiations, highlighting the difficulty associated with big take-privates.
Those challenges underscore why firms including KKR, Blackstone and Advent have pursued bets at the other end of the spectrum, top executives and dealmakers said.
“Despite the large quantums of equity raised, it feels like recessionary fears and difficult financing conditions have made the larger deals tougher,” said John Richert, head of regional investment banking at JPMorgan Chase. He added that the smaller deals simply came with “less risk to capital”.
Large US and European private equity firms have found success employing so-called ‘buy and build’ strategies, acquiring and assembling a string of small companies within a sector and then exiting through a listing or sale. Alongside that, private equity firms have raised specialist funds to invest in young technology groups.
This strategy has been driven by a lack of acquisition targets, with equity markets at record highs and a stiffening of competition for high-quality assets. The effect of those conditions has only pushed asset prices up further and weighed on returns.
“If you have a single asset you have to pay a relatively high price for, the value-creation plan has to be fairly ambitious,” said Christian Sinding, chief executive of EQT, a large European buyout group. Those valuations have pushed firms to review smaller companies for sale that require “building on to it,” he added.
Examples of smaller deals that have been funded by some of the near $2.5tn of unspent cash include Advent’s takeover of hotel operator Aimbridge Hospitality, which it later merged with Interstate Hotels & Resorts. Both transactions were worth less than $1bn, a person briefed on the matter said.
Last month CVC bought a 50 per cent stake in pharmaceutical supplier DFE Pharma for less than $500m. Apollo agreed to buy 32 stores from French retailer Casino for €470m and Advent bought Enamor, an Indian lingerie company, for $45m.
“At this point in the cycle, with high valuations and fewer large deals emanating from cash-rich corporates, investors naturally look to smaller companies with organic growth,” said Nikos Stathopoulos, partner at BC Partners.
While private equity groups have identified some high-profile targets on the horizon — including Thyssenkrupp’s lifts business — advisers said the move into smaller deals is in part due to a shortage of options. Average deal sizes within the so-called middle market — those deals below $1bn — are already rising, according to data provider Pitchbook.
“If billion-dollar deals are not happening because there aren’t companies for sale, then you go lower because you need to spend the money,” said Simona Maellare, global co-head of the alternative capital group at UBS.
The smaller transactions have also benefited from the rise of direct lenders such as Ares, Antares and Owl Rock, who have raised billions of dollars to finance leveraged buyouts. This has eased financing restraints on sub-$500m transactions; investors in the leveraged loan and high-yield bond markets — the traditional sources of funding for PE dealmaking — have directed their attention to larger deals.
“This trend is expected to continue given the abundance of private equity funds seeking to acquire these assets coupled with the increase in direct lenders looking to fund these acquisitions,” said David Kamo, a senior private equity banker at Goldman Sachs.