Toshiba has agreed to sell its memory chip unit to a Bain-led consortium © Reuters
Record sums of unspent capital, cheap debt and highly favourable borrowing terms have pushed the value of global private equity transactions to $212bn, its highest level since the boom years of a decade ago.
Buyout values surged nearly 25 per cent in the first nine months of the year, representing just under a tenth of total M&A dealmaking, according to data from Thomson Reuters, with activity in the US and Europe at its strongest since 2007 when it reached $526bn in the same period.
Worldwide M&A activity totalled $2.4tn during the year-to-date 2017, up 2 per cent compared with the same period last year.
The latest figures include some of the private equity industry’s biggest deals since the financial crisis, including an $18bn deal for Toshiba’s memory chip unit by a Bain Capital-led consortium, a planned $6.5bn takeover of US office supply retailer Staples by Sycamore Partners and the $5.3bn buyout of Scandinavian payments processor Nets A/S by Hellman & Friedman.
“The summer months were some of the busiest I can remember for some time,” said David Walker, global co-chair of private equity at Latham & Watkins.
From CVC in Europe to Apollo Global Management in the US, private equity groups have rapidly raised record-sized funds backed by institutional and sovereign investors who are chasing high returns in a low-interest rate environment. Moreover, Saudi Arabia’s aggressive shift into private equity investing has prompted the creation of SoftBank’s $93bn Vision Fund and a planned $40bn infrastructure fund led by Blackstone.
Fuelling the boom are more relaxed debt terms and an ability to access loans more easily, which is also propelling deal activity. The rates at which private equity sponsors can raise bonds and loans has hit all-time lows, helped by a marked increase in the issuance of collateralised-loan obligations — the biggest buyers of leveraged loans.
Marc Nachmann, co-head of global investment banking at Goldman Sachs, said: “The constraint on private equity has been the opportunity set of available targets rather than the backing of the financing markets.”
In total, buyouts in Europe reached $69bn in the first nine months of 2017, representing a 60 per cent increase from the same period a year earlier. In the US, buyouts amounted to $105bn, or a 31 per cent rise. Asia-Pacific buyouts fell by nearly half to $24bn.
Large corporations, including Unilever, Akzo Nobel and Sanofi, are all looking to dispose of multibillion units in the coming months and are all likely targets for private equity. Multiple dealmakers told the FT that they expect to see a $10bn — or greater — private equity deal targeting a publicly traded company before the end of the year.
Mark Redman, global head of private equity at Omers, a Canadian pension fund, said: “We could have two to three years of relatively buoyant growth and high levels of M&A.”
“There is a wall of capital looking to [be deployed] in a low return, low risk environment. It will continue to be a sellers’ market, until there is some shock,” he added.
In August, Bain Capital and Cinven clinched a €4.1bn takeover of German generic drugmaker Stada, only after offering a 50 per cent premium to its undisturbed share price to see off a rival bid from Advent International and Permira.
Hellman & Friedman, which is paying roughly a 30 per cent premium to the unaffected Nets share price, has conceded that it must use the company as a platform for consolidation if it is to generate sufficient returns. The buyout group is planning to lever up Nets so that it has net debt of more than seven times its trailing earnings before interest, tax, depreciation and amortisation.
“The prices being paid by private equity today on average are the highest they have been for the last ten years,” said one private equity executive with more than two decades experience in dealmaking.
Does all this mean we are in a bubble? “I don’t know.”