Leveraged buyouts: big funds flaunt their equity muscle

Critics of private equity hoot that buyout groups inevitably miss out on bargains when company prices fall because debt is then harder to obtain. For the biggest private equity firms, today’s tightening credit market is giving them a chance to challenge that limitation.

Earlier this week, tech-focused Silver Lake announced that it would acquire the software company Qualtrics for $12bn. Of that purchase price, $10bn will be in the form of equity funded by Silver Lake and other partners.

Private equity firms typically make equity investments equivalent to a third or less of the sticker price. That allows them to hit a target of 20-25 per cent annual internal rates of return.

Massive equity cheques suggest buyers are sanguine about living without the big gains previously possible. It seems they are happy simply to write a big cheque today, collect management fees and hit a mediocre return, given how volatile asset markets are.

Two other large private equity buyouts were announced this week: the acquisition of another software business, Cvent, for $4.6bn and the $8.1bn purchase of chemical company Univar. The equity component in each was around 50 per cent.

Qualtrics and Cvent went public in the go-go year that was 2021. Their 2023 buyouts were at sharp discounts to their initial public offering prices. Neither have yet managed to turn a serious profit. Their new owners can afford to be patient, having paid modest valuations with little debt service required.

The handful of very large private equity firms have fund sizes now that approach $30bn. This allows them to bid for the biggest companies against limited competition. Such funds may not achieve massive outsized returns. But high management fees can make up the difference.

Large pensions and wealth funds increasingly want stable returns over long periods rather than episodic blockbuster flips. With public debt markets in flux and private credit still a nascent and expensive market, expect buyout specialists to boldly kick in more money.