Public-to-private deals offer a bright spot in flat M&A market

Private equity buyout activity has slowed in the face of macroeconomic headwinds, but public-to-private transactions have shown little sign of slowing down

Private equity (PE) dealmakers eager to deploy capital have not had an easy run in 2023, with macroeconomic disruption and geopolitical uncertainty taking a heavy toll on new deal activity.

In Q1 2023, global buyout deal volume declined 26% year-on-year to 1,552 transactions, with deal value for the period dropping 51% year-on-year to US$148.4 billion. Public-to-private (P2P) transactions, where investors take public companies private, is one transaction option that has bucked the trend and has continued to present investment opportunity for PE sponsors in choppy markets. 

According to Mergermarket, there were 30 P2Ps worth US$70.9 billion recorded in Q1 2023, with volume almost double the 16 P2Ps seen in Q1 2022 and value climbing 12% year-on-year.

Window of opportunity

Momentum behind P2P deals increased throughout 2022 as the conflict in Ukraine and rising interest rates sparked significant declines in public stock market prices, offering PE dealmakers a window to acquire publicly traded companies at attractive entry prices.

The S&P 500 shed more than a fifth of its value from the beginning of 2022 to the market nadir in October 2022, and while equities have since rallied, prices have remained below the levels observed in 2021. Listed companies have continued to trade at cheaper valuations than have been available for several years.

Foreign currency fluctuations have also spurred investor appetite for P2Ps. For sponsors in the US, the strong US dollar made public and private cross-border M&A into the UK and Europe particularly appealing, with the dollar reaching parity with the euro for the first time in two decades in 2022. While the relative strength of the US dollar against the sterling and euro has dipped in 2023, the historical strength of the US dollar continues to provide an incentive for US buyers to pursue cross-border P2Ps.

Big ticket P2Ps in Q1 2023 include CPP Investments and Silver Lake acquiring survey software company Qualtrics in a US$12.5 billion deal, Clayton, Dubilier & Rice delisting wealth manager Focus Financial Partners for US$7 billion and Cinven’s non-binding expression of interest bidding of €2.2 billion for German laboratory operator Synlab.

Stock market performance may also offer prospective P2P opportunities to mid-market investors. Many smaller companies that went public through deals with special purpose acquisition companies (SPACs) in the boom of 2020 and 2021 have underperformed since going public, which may create opportunities for transactions with PE firms.

Direct lenders enter P2P financing 

PE firms have also been able to rely on financing support from direct lenders for P2P deals. Traditionally funded by syndicated loans and high yield bonds, more sponsors have turned to direct lenders in the past 12 months to provide debt for P2P deals.

The slowdown in syndicated loan and high yield debt issuance and the trend of private credit providers forming lending clubs (sometimes as large as 20 or more lenders) to combine resources to fund large P2Ps have driven more sponsors to seek private credit investors for these deals.

For example, Vista Equity Partners’ US$8.4 billion take private of tax software business Avalara was financed with a US$2.5 billion unitranche loan provided by a consortium of lenders led by Blue Owl Capital.

Other P2P deals that have been financed by direct lenders include Vista’s acquisition of insuretech provider Duck Creek Technologies, which obtained a US$650 million loan from a lending consortium led by Oaktree, and the US$1.5 billion P2P of SurveyMonkey developer Momentive Global by Symphony Technology Group, with Silver Point Finance arranging a US$450 million loan for the deal.

The emergence of direct lenders as reliable financing providers for P2Ps has given PE sponsors additional flexibility when putting together debt packages for these deals.

Dual track processes—where PE firms bid for listed companies with financing commitments from private credit in place, while also attempting to secure a syndicated loan and/or high yield bonds before the deal closes—are another option for sponsors. However, private credit providers have been increasingly focused on “deal away” protections such as alternative transaction fees to protect against this scenario.

In some cases, sponsors have chosen to underwrite P2Ps with their own equity and then seek to refinance after the deal closes.

Cross-border considerations

Meanwhile, foreign exchange fluctuations have led to sponsors raising debt in multiple currencies where cross-border P2Ps are involved. When debt markets are strong, dealmakers will generally aim to match the financing currency to the cash flows of the deal target with the debt that is being raised. However, in more volatile markets or when targets have a mix of revenues in different currencies, there may be opportunities to structure financing packages with a mix of debt tranches in different currencies in order to achieve the best execution.

Raising capital in multiple currencies across several jurisdictions comes with added layers of complexity. Borrowers must navigate currency hedging costs and other structuring elements, including withholding tax (a tax levied by an overseas government on interest received by non-residents) and guarantee and security requirementswhich vary across jurisdictions.

In a period when liquidity is constrained, however, the flexibility and benefits of expanding the universe of lenders and optimizing capital structures by raising capital in more than one currency may outweigh the additional complexity and costs.

With stock markets still experiencing volatility–most recently in light of monetary policy announcements pointing to higher-for-longer interest rates–dealmakers may continue to look to P2Ps as a viable investment option.

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