In some regions, notably Europe, the number of growth capital vehicles currently raising capital is exceeding the number of buyout vehicles for the first time ever according to Preqin data.
For PE firms, the space is compelling for a number of reasons:
- A broader investible universe – the large amount of smaller family-run and entrepreneur-owned businesses not interested in selling to PE are often amenable to majority stakes.
- Less intermediation – many of these companies are looking for partners with value-adds beyond capital, allowing PE teams to differentiate themselves in order to secure deals.
- Timing is right to capture value – early movement positions PE firms to capitalize on increased growth rates and access to companies at earlier stages of their maturity curve.
Carve-out opportunities increasing as strategics recover from M&A hangover
After successive years of record-setting M&A activity, strategics are increasingly looking to divest many of their noncore assets in order to focus on their core businesses.
A number of dynamics are increasing the number of carve-out opportunities in the market. Increasing activity by activist investors is leading many companies to trim their portfolios on a proactive basis. According to a report from Activist Insight, in 2018 more than 900 companies received governance-related proposals from activists, a figure that’s grown more than 40% over the last five years. Moreover, reductions in the US corporate tax rate have reduced the tax burdens of large asset sales.
The first quarter saw a number of high-profile carve-outs go to PE firms, including the US$3.4b acquisition of Evonik Industries’ methacrylates chemicals business by Advent International, and the acquisition of Kroger Co.’s Turkey Hill Dairy business by Austin-based Peak Rock Capital. For PE firms with the ability to execute, such deals can be compelling opportunities – relative to other deals types, the complexity involved with large carve-out transactions is a natural barrier to entry, allowing those firms with the sophistication and experience (and the right levels of dry powder) the opportunity to operate with less competition.
Take-privates continue to offer opportunity for PE, despite a shrinking pool of targets
While still nowhere near the heady days of 2007, take-privates continue to offer a steady source of deal flow for PE firms, exceeding more than US$100b in activity last year. Technology and health care are the largest target sectors for these deals – together, they accounted for almost two-thirds of PE take-private deals last year. If Q1 activity is any indication, momentum is poised to continue unabated. The first quarter of this year saw sponsors announce 16 deals valued at a collective US$37b.
Indeed, despite mounting concerns around slowing economic growth and the potential for increased market volatility, PE’s willingness to engage in these spaces is likely to effectively put a floor on public market valuations for the foreseeable future.
Demand for PE’s unique competencies will remain high. Over the last 12 months, firms have raised more than US$675b – while off the peak of 2017, secular trends, including new investors to the asset class, will provide strong tailwinds. The challenge for firms, as we forge deeper into the macroeconomic cycle, will be to continue to develop disciplined ways of deploying capital in ways that stay true to their core identity, and which allow ample headroom for continued growth.