Blockbuster buyouts are few and far between these days, but there are other ways to stay busy.
Private equity firms announced more than 2,000 takeovers in 2016, edging just past the number of transactions seen during the previous peak in 2007, according to data compiled by Bloomberg. Research firm Preqin uses a broader definition and estimates private equity-backed buyouts likely surpassed 4,000 last year. Few of these transactions were particularly large. Rather, last year's record indicates a determination to put cash to work -- high valuations and competition be damned -- by using different deal structures and pursuing smaller targets.
This willingness to be flexible bodes well for buyout activity in 2017. Law firms are receiving non-disclosure agreements by the hundreds for assets that go on the block, according to Mel Cherney, a partner at Arnold & Porter Kaye Scholer. That indicates private equity firms are still duking it out with each other and strategic buyers over attractive businesses. Meanwhile, if this post-election rally keeps up, pricey targets are going to get even more expensive, so private equity firms will likely have to be creative if they want to find a use for a mountain of buyout dry powder that Preqin pegs at about $525 billion.
Last year's deals provide a blueprint. Apollo Global Management LLC and Clearlake Capital Group LP acted more like strategic acquirers by using buyouts to build out businesses they already own. Synergy benefits helped make the deals better bargains. Others have stayed occupied by downsizing. Bain Capital Private Equity teamed up with Bow Street LLC to buy online-jewelry retailer Blue Nile Inc. for about $500 million -- a far cry from the $33 billion takeover of hospital operator HCA Inc. it assisted with in 2006. Some have negotiated more affordable transactions by doing deals with fellow private equity firms, one example being TPG's agreement to purchase two cable operators from smaller buyout shop Abry Partners LLC at a discount to other recent industry takeovers.
The median Ebitda multiple for private equity buyouts valued at more than $100 million was 11 last year. That's down from valuations in 2015, but it still isn't cheap. To be paying those kinds of multiples, firms must have an even stronger conviction that they can grow decent profits by the time they're ready to sell, either through organic expansion or by making less expensive bolt-on acquisitions down the road.
Expect more of the same in 2017. Carlyle Group LP, CVC Capital Partners and Blackstone Group LP now have funds with lower return targets that can hold companies for longer than the typical three-to-five year period, signaling that they're prepared to vary from the typical playbook.
Even if buyout activity remains strong, the odds of the dollar amount reaching levels to rival the boom days of a decade ago are low. Megadeals like HCA were possible because private equity firms teamed up in groups sometimes as big as seven. While speculation has bubbled up as to whether President-elect Donald Trump's seemingly lax attitudes on antitrust matters not involving Time Warner Inc. could spur a revival in these so-called club deals, it seems unlikely that investors in private equity firms would go for it. These days, they'd rather participate in the buyout than have more than two of the funds they invest in be tied up on the same deal.
Good thing private equity firms have other options. The risk of a one-off geopolitical event or trade wars under Trump shouldn't be dismissed, but for now, all signs point to another busy year for buyouts.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Due to different timelines, club deals have also proved to be difficult to manage because firms have different incentives, e.g. one may want to sell earlier than others if it's about to embark on a new fundraising. They may also disagree on the direction and strategy, which can prove distracting to the company's management.
An example of this was Hellman & Friedman LLC's $7.5 billion deal for health-care cost-management services provider MultiPlan Inc. last year, which it is undertaking alongside Leonard Green & Partners LP and Singaporean sovereign fund GIC Pte Ltd
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