Blackstone's largest deal in a decade reflects vigorous global buyout activity
Since the start of 2017, increasing competition, cheap financing and record fundraising has led to increasingly larger buyouts, and the trend shows no signs of waning.
Blackstone's $17bn buyout of Thomson Reuters’ financial & risk business last week perfectly illustrates the growing prowess of private equity and marks the fund’s largest buyout since the financial crisis and its seventh $10bn-plus deal.
Last year, buyout activity reached its highest point since 2007, recording an eye-watering $517.5bn across 3,415 deals. Three of these breached the $10bn mark, including CPPIB and Energy Capital Partners’ $17bn buyout of power producer, Calpine Corporation [NYSE:CPN]. To compare, there were six deals of that size in the seven-year period between 2010 and 2017. Private equity accounted for 16.2% of global M&A value in 2017, up from 12.7% in 2016 and the highest share since 2007’s 23%.
Click here to see YTD global buyout activity.
And dealmakers agree that there is more to come. Tom Whelan, global head of private equity at Hogan Lovells, said he expects to see more buyouts above $1bn in 2018, compared to 2017.
Last month began living up to expectations with 183 buyouts worth $39bn announced. This represents the strongest January since the financial crisis ($48.6bn in 2007). Ten of these buyouts reached the $1bn mark, with Blackstone involved in two of these – acquiring Mime Petroleum in consortium with Blue Water Energy, and Thomson Reuters. James Cross, an M&A partner in London with law firm Reed Smith, said 2018 dealmaking is off to a flying start.
‘A Wall Of Money’
After a record year of fundraising, dry powder stands at sky-high levels. Consequently, we have seen multiples increase and levels of buyouts soar. “Fundraising is at a post-crisis high and debt is readily available. There is a wall of money chasing good assets,” Cross stated. At the same time, sellers are keen to divest non-core assets and take advantage of high multiples, which may provide investment opportunities for PE players.
Those multiples are being pushed higher by greater competition from corporate buyers with healthy balance sheets and cash-on-hand. Many large institutional investors have also ramped up their co-investment activity, with Canadian pension funds and sovereign wealth funds among the most active investors. Nick Jones, partner at Cavendish Corporate Finance, said, “The increase in activity reflects an environment where private equity firms are facing intense competition for assets among themselves, as well as from corporate buyers and large institutional investors.”
The crowded field of buyers means PE firms have to pay more, and Ian Borman, partner at Winston & Strawn, commented that “direct competition increases the pressure on PE firms to demonstrate value added in their transactions.”
This increased competition has left the mid-market saturated, meaning some have been pushed toward the higher end of the scale. “Historically there have been fewer funds able to participate at this level. In the mid-market you could have up to 30 contenders for an asset, compared to five to 10 at the larger end of the scale. Therefore your chances of conversion, on a statistical ratio, are greater,” said Whelan. The large-cap buyout market is one that has not been fully exploited, he added.
Activists Stoke Fire For Carve-Out Deals
In a market where competition is fierce and good assets are scarce, carve-out opportunities are a gold mine for PE funds looking for sources of primary deals and undeveloped businesses with plenty of potential. Large, listed firms with non-core, under-performing assets could become prime targets for private equity in the coming months – with growing activism likely to play a key role. “Shareholder activism is a catalyst”, Whelan indicated. “There is a lot of hidden value in conglomerates and large, listed companies.”
More such opportunities could emerge from today’s stock market volatility. With the “fear gauge” VIX index hitting 40 for the first time since 2015, choppy waters could create share price troughs that would make boards receptive to bids for certain business units. This is the positive read.
Alternatively, the concern over central banks’ control of inflationary forces throughout the developed world might see financing terms become less accommodative than in recent years.
Those private equities with the firepower to do so may wish to strike now, while momentum remains.
by Jonathan Klonowski and Silvia Paparello
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