Photographer: Simon Dawson/Bloomberg

JPMorgan Expects Cheap Funding to Bolster Buyout Deals Next Year

  • Private equity firms keen for bigger deals to deploy cash
  • High valuation levels may convince owners to sell more assets

Private equity firms in Europe are set to engage in more deal activity because of increased liquidity in the market and mounting piles of cash, according to JPMorgan Chase & Co.

Buyout firms -- which use a mix of debt and equity to finance their acquisitions -- have preferred to refinance portfolio companies’ debt using loans or bonds as an alternative to selling their businesses this year.

The balance is likely to shift toward more transactions in 2018, said Daniel Rudnicki, managing director of sponsor leveraged finance for Europe, the Middle East and Africa, at the U.S. bank’s leveraged finance conference in London this week.

“Low interest rates and spreads continue to support high leverage levels and in turn valuations,” Rudnicki said. Year-to-date, the private equity flow has been split about evenly between debt refinancing and mergers and acquisitions, he said.

Debt raised for M&A and refinancing in Europe this year reached 44.6 billion euros ($53.8 billion) as of August, compared with 33.8 billion euros in the same period last year, according to data compiled by Bloomberg. Loans for M&A represented about 49 percent of that, the data show.

Bidding Wars

Though public-to-private deals can be more complicated, private equity firms don’t have the luxury of not looking at these assets in the current market, Rudnicki said. With relatively few companies for sale, private equity companies will need to look at various ways to spend their cash.

In addition, buyout firms had amassed a record $1.6 trillion in dry powder, funds they’d raised but not deployed, through August, according to data provider Preqin. That’s led to bidding wars.

“We will do deals when we see them,” said Soren Christensen, a partner at Cinven. Although the outcome of “public-to-private and carve outs are harder to predict.”

In the past year, Cinven and Bain Capital spent months fending off private equity rivals and activists in an attempt to buy listed German drugmaker Stada Arzneimittel AG. Last month, the partners finally succeeded at winning enough shareholders to move forward with their takeover of the company, agreeing to pay most shareholders a premium of nearly 50 percent from Stada’s share price in December.

Danish payment-services provider Nets A/S has also attracted buyout interest, with firms including Permira, Nordic Capital and Hellman & Friedman considering bids, people familiar with the matter said in July.

Evening out the Lumps

The environment at the moment is characterized by a small number of large deals that have become disproportionately important. With few deals in the market, private equity firms that miss out on these opportunities are left wondering when the next big opportunity for them to deploy their cash will arise.

“Our pipeline is currently characterized by a smaller number of larger transactions, which compares with a larger number of smaller transactions earlier in the year,” said Mark Danzey, director at KKR Capital Markets.

Still, the firms are hopeful that owners will be more receptive to bidders with increasingly deep pockets next year.

“The amount of liquidity in the market will sustain transaction volumes,” said Nigel Walder, managing director at Bain.

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