Buyout Firms Hunt for Fresh Targets as They Swap Fewer Assets

  • Fewer vintage assets are available and dry powder is building
  • Stada bidding war shows PE’s renewed interest in takeovers

Private equity firms are being driven to search for fresh targets as a cycle of buying and selling each others’ assets slows down.

The number of so-called secondary buyouts, sales of companies from one private equity firm to another, are drying up, executives at the SuperReturn International conference in Berlin said last week.

Many private equity firms have already sold their vintage assets, businesses that have been held for about five years and are ready to go on the block, and other companies in their portfolios aren’t yet ripe for an exit. As a result, buyout firms are looking for opportunities to take publicly traded companies private or to carve out units from larger businesses as a way to invest mounting piles of cash.

The assets that do come on the market can spark a feeding frenzy. Private equity firms are vying to buy German generic drugs maker Stada Arzneimittel AG and de-list its shares. Advent International Corp., Cinven Ltd. and Bain Capital have already submitted bids, and the company is still seeking additional offers.

“Despite the complexities of doing public-to-privates in Europe, we see more and more transactions,” said Christian Sinding, head of equity at EQT Partners AB. The company seeks businesses where “a public company does not have the right management team and the board is not willing or able to challenge and support them,” stalling growth.

Buyout-backed exits globally in 2016 dropped 23 percent in value and 19 percent in count from 2015, as fewer private equity firms sold assets, according to Bain & Co.’s global private equity report. With the number of secondary buyouts on the decline, private equity firms will look to the public markets and to corporate carve-outs for deal opportunities, executives at the conference said.

Slow Burn

The downside to buying businesses from shareholders or parent companies is that the deals can take longer to pull off, if they happen at all. Assets owned by other private equity firms are, theoretically, always for sale.

“Some of the most interesting investment opportunities we see at present are in corporate carve-outs,” Sinding said. “While these are often slow burn processes, they can be great investments when done right.”

When EQT bought a stake in Sivantos from Siemens AG in 2015, the transaction itself took less than a month, but the private equity firm had been speaking to the parent company about the business for five years, Sinding said. Such transactions require a huge amount of discipline and resources, he said.

Adding to the pressure to get deals done, private equity firms are sitting on a record $1.47 trillion of dry powder, capital they’ve raised and haven’t deployed, according to the Bain & Co. report. Their investors expect returns, which can’t happen if deals are stuck in limbo or difficult to find.

New Approach

High valuations may also make companies more willing to sell. At the start of 2016, acquisition multiples for companies in the U.S. and Europe reached record or near-record highs in the U.S. and Europe, at more than 10 times earnings before interest, taxes, depreciation and amortization, according to the report.

Buyout funds are also working more closely with the companies they target, said Roberto Quarta, partner with Clayton Dubilier & Rice. The new approach makes a deal more likely because the private equity buyer can take advantage of the operating expertise from its corporate partner. 

“Today we have evolved into a more structured approach of partnership with the seller,” he said. “We are doing more and more partnership deals with corporates and with family businesses. To us, that’s an evolution of the corporate carve-out of the ’80s and early ’90s.”