The start of the year has been defined by a large number of private equity firms clearing out assets and finding ways to withdraw from investments. There have been unusually many of these buyout firm withdrawals – much more so than private equity firms acquiring new assets in terms of volume. But what is behind this deal activity and what routes are firms taking? Is the era of high valuations free from troubles?
Three Routes for Withdrawing Investments
The most common paths to an exit for private equity firms fall into three categories. First, firms can exit from their assets by listing companies they’ve taken private on the stock market. For example, the Univision IPO is a great example of how firms are taking advantage of the current climate. Although the IPO is yet to take place, it is already expected to be among the biggest of the year. For the private equity firms involved, it’s also going to mark the end of a tough period.
Second, firms are able to sell their assets to other strategic bidders and private equity firms. This option has been especially favourable at the start of the year and number of private equity firms now follow the ‘dual track’ approach, meaning they are looking at initial public offering (IPO) and a possible sale simultaneously. One example from recent months is the sale of thetrainline.com in the UK. Private equity firm Exponent was looking to list the company right before the private equity firm KKR bought it.
Third and final route used is taking some cash out of the company and restructuring the debt for a later exit. According to the Financial Times, this is currently a more lucrative option, as interest rates are low, making refinancing debt cheaper. Just on Tuesday, private equity firm Permira announced it is selling off its remaining stake in Hugo Boss. The company has been slowly decreasing its stake in the fashion company in recent years and has now decided to finalise its exit.
Record Numbers of Exits
Data shows the start of the year has been busy in terms of exits. Dealogic’s data shows private equity firm exits in 2015 have generated $63.5 billion. This is a third more than in the same period in 2014. Furthermore, 2014 wasn’t a bad year for exits – meaning this year is set to be even stronger. Preqin’s data shows private equity firms were able to generate $428 billion from withdrawing from assets. This is quite an increase for the previous high of $308 billion in 2006.
The Financial Times report on private equity assets points out that the past five years have been a time of heavy investment. Nevertheless, the valuations of companies have remained a lot lower than pre-financial crash. The report cites Bernstein analysts, which estimated the industry invested £3.2 trillion between 2005 and 2008. The investment took place in companies “typically valued at more than eight times their earnings before interest, tax, depreciation and amortisation (EBITDA).
But if you look at the deals made during 2009 and 2014, the situation has changed. Firms invested $3.7 trillion but in companies with valuations of 6.5 times EBITDA. Private equity firms have been increasingly interested in deploying capital.
Great Time for Exits
But the situation has now rapidly changed from last year, as company valuations have been increasing. For example, in one of the year’s biggest exits, the sale of Freescale by private equity firms Permira, Blackstone, TGP Capital and Carlyle managed to reap a staggering $16.7 billion. The private equity consortium bought the company pre-financial crash and “spent years valued at earnings multiple below the purchase price”. This was until the valuations suddenly started to climb.
Furthermore, the start of the year has seen exits around the globe. There have been big deals in the US, Europe, Asia and other emerging markets, highlighting the fact that company valuations are currently strong. On the other hand, we’ve previously mentioned that IPO activity has been slowing down, which highlights the fact that many private equity firms are currently opting to exit by selling their stake to other investors.
Problems with Surging Valuations
But the increasing valuations aren’t necessarily entirely free from problems. Dealogic’s data also shows that 2015 has been the worst year since 2002 in terms of firms acquiring new assets. When private equity firms have been investing their money, it has come at a considerable cost. Expectations for reasonable returns are much lower and many fund managers have acknowledged this issue. According to the Financial Times, “ten is the new seven in earnings multiples”.
The amount of ‘dry powder’ currently sitting on funds is thought to be problematic. The Financial Times reported earlier this year that funds in North America alone have $685 billion worth of equity waiting to be invested. In Europe, the number is currently a little lower at $300 billion. It is, nonetheless, adding pressure on managers to find lucrative opportunities in the market to keep investors happy. All of this could potentially lead to funds investing in far riskier deals in search for opportunities. But for firms looking to exit, there will be plenty of interest around and many small and mid-market companies could also benefit from the surge in equity.
Example of Center Parcs
Among the most recent examples of private equity firms clearing out assets, is the example of Center Parcs. The private equity firm Blackstone announced on Monday it is looking to withdraw from its investment, possibly through an initial public offering. But immediately, the UK-based holiday village operator had received interest from global sovereign wealth funds and other private equity firms.
According to the Independent, companies such as the Abu Dhabi Investment Authority and Carlyle are among those interested. Center Parcs is currently valued at £2.5 billion, giving Blackstone a lucrative exit opportunity. It will be interesting to see how the situation will develop in the coming months. Many experts predict that there will continue to be big exits and that valuations will continue to stay high.
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