Deals between private equity firms in Europe have plunged to their lowest levels since the Covid-19 pandemic as the buyout game of pass-the-parcel is hit by rising debt costs and investors’ concerns about the economic outlook.
In the first three months of this year the value of deals struck between rival private equity firms in Europe fell to its lowest point since the second quarter of 2020, according to data provider PitchBook, as buyout houses seeking to exit investments struggled to agree on prices.
Just €16.8bn worth of companies were traded between investment firms — less than half the value of deals struck over the same period last year. Initial public offerings had their second worst quarter over the same time period, PitchBook data shows.
“It’s a very tough time to exit anything and sponsor to sponsor deals are the most acutely impacted,” Hugh MacArthur, global chair of Bain & Co’s private equity team said. “You have the macro uncertainty and, by the way, debt costs a lot more, so unless you are willing to ignore that then it is very difficult to get these deals done.”
The practice of private equity firms selling assets to one another has boomed over the past decade as the era of low interest rates let firms raise record sums which they were under pressure to deploy.
The peak for intra-PE deals came in 2021 when, buoyed by the economic rebound of reopening after pandemic lockdowns, €173bn of companies were traded between buyout firms.
Some companies passed between PE hands four or five times at ever higher valuations. Vincent Mortier of asset manager Amundi likened the practice to a Ponzi scheme. Last June, Mortier warned that firms would face a reckoning in the coming years.
With PE firms now baulking at buying assets from each other, deals are at risk of falling apart as sellers are unwilling to compromise on price.
In recent weeks, two prominent auction processes for private equity-owned companies — veterinary clinic chain VetPartners and biometrics technology company IDEMIA — have attracted muted interest from rival firms, according to people familiar with the matter.
Both companies received fewer offers than expected as potential private equity buyers were put off by high pricing expectations and increased borrowing costs, the people said. Talks were ongoing with at least one prospective buyer of VetPartners, one of the people added. Both groups declined to comment.
Eurazeo’s sale of French insurance company Groupe Premium is facing similar difficulties, other people said. Eurazeo declined to comment. Groupe Premium did not reply to a request for comment.
The slowdown means buyout groups are struggling to cash in on their bets. As a consequence, firms seeking to raise new funds from their backers are having difficulty as investors typically like to have cash returned to them before backing managers again.
Investors in private equity funds have also been hit by the so-called denominator effect whereby publicly traded assets fall in value in real time but private assets are not marked down as much — so an increasing proportion of investors’ portfolios is held in private markets.
This phenomenon has amplified the need for investors to receive cash back from the firms they invest with, before they are able to make fresh commitments.
“There is no equilibrium on valuation,” said Simona Maellare, global co-head of the alternative capital group at UBS. “What limited partners are caring about is distributions and the easiest deals to do are deals to sell to another PE.”
“One of the biggest problems for sponsors now is the LBO math doesn’t work — valuations remain inflated and the cost of borrowing has gone up,” said Saba Nazar, co-head of global financial sponsors at Bank of America.
The need to return money to investors is forcing firms to get creative.
One tactic is so-called “continuation funds”. These enable firms to move assets from one fund they manage to another, without having to sell or list the asset.
Swedish firm EQT, for example, is building out an in-house team to help do these types of deals. This week European buyout firm Triton announced it had sold four portfolio companies it owned to a continuation fund in a €1.6 billion deal.
Private equity firms have also found some success in selling assets to corporate buyers or cash-rich sovereign wealth funds. Last month Bridgepoint sold its dialysis clinic chain Diaverum to a health venture backed by an Abu Dhabi sovereign wealth fund.
“A lot of sovereign wealth funds are awash with cash and they are keen to deploy it in the right businesses where they can make a clear return,” Nazar said.
Those without access to those pools of capital hope that the world’s leading central banks stop raising rates sooner rather than later, so that they can avoid crystallising losses by selling at lower valuations or losing out on deals completely.
“Everybody can survive a year without doing too much but [18 months] or two years is a long period of time,” MacArthur said.
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