Private Equity Firms Seek Value in Public Markets | White & Case LLP
Private activity peaked in the first half of 2021, fueled by large sums of dry powder and fierce competition for assets
The takeover of Morrison’s supermarket chain, the UK’s fourth largest, caused a sensation.
The UK-based supermarket chain is the subject of a bidding war between US private equity firm Clayton Dubilier & Rice (CD&R) and a consortium led by Fortress Investment Group. After weeks of competing offers, Morrison’s board of directors accepted a revised offer from CD&R, which gave the supermarket chain an enterprise value of $ 14 billion. The transaction is subject to shareholder approval, with the possibility that the Fortress-led consortium will come back with another offer.
The deal is among the largest public-private (P2P) transactions of 2021 to date. It’s also symbolic of a strategy that is back in vogue for private equity investors after a period of calm last year amid pandemic-induced market volatility. Stock markets have become a primary source of transactions for private equity managers in recent years, in part due to their unstoppable ability to raise capital.
Already in the first half of 2021, global activity in privatization deals involving private equity firms amounted to US $ 113.5 billion. Not only is this more than double the total seen in the previous six months ($ 50.7 billion), but it also represents the highest half-yearly value since the first half of 2007, which saw activity of 258.6 billion. billions of dollars. Likewise, the 46 transactions recorded in transaction volume in the first six months of this year represent the highest half-yearly total in ten years, equaling the 46 transactions recorded in the first half of 2011.
This level of activity has been fueled by private equity firms’ access to capital. Dry powder is currently somewhere in the US $ 2 trillion region and competition for private assets has never been stronger. Add Special Purpose Acquisition Companies (SPACs) to the mix, which have around US $ 133 billion, not counting leverage, and PE is pushed to look for more and more opportunities.
Growing competition for private companies in recent years has made some listed assets appear relatively cheap. Even in coveted industries, such as technology, there are relative bargains.
The biggest P2P of the first half of 2021 saw Thoma Bravo remove Proofpoint from the NASDAQ stock exchange for $ 12.3 billion, or 11.7 times the cybersecurity company’s 2020 revenue, and that includes a buy premium of 34%. For comparison, the median income multiple of the BVP Nasdaq Emerging Cloud Index at the time of the trade was 18.6x.
Proofpoint was in deficit in 2020, making multiple profit valuation impossible and also making it difficult to compare with similar private transactions. However, private assets are in many cases changing hands for mind-boggling multiples.
This is especially true for software and IT services companies, an investment strategy supported by the change in working arrangements brought about by the pandemic. According to one estimate, the median multiple of EV / EBITDA private equity transactions in the IT industry exceeded 20 times in 2020, double the price paid a decade earlier. It is in this context of rising multiples in the private sector that PE funds have sought to capitalize on public market arbitrage.
Discounts in the UK
Private equity firms will continue to seek value where they can find it. This is what makes Morrison’s deal, and the UK stock market more broadly, so attractive. A British pound weakened by Brexit made assets attractive in terms of currencies. Add to that the deterrent effect that the UK’s exit from the European Union has had on its stock market. Indeed, the discount of UK stocks relative to their global peers is the largest in more than three decades.
The FTSE 100 continues to trade below pre-pandemic levels, while the STOXX Europe 600 is up around 9% and the S&P 500 over 30%. Nor is it just a function of diverging corporate performance. The FTSE is trading at around 12.6x futures earnings versus 21x and 16.3x respectively for the aforementioned US and European benchmarks.
These fundamentals fueled increased activity in the first half of 2021, including KKR’s acquisition of infrastructure investment firm John Laing Group for US $ 2.8 billion and CD&R’s successful takeover of ‘UDG Healthcare, a UK listed and Ireland-based healthcare consultancy firm, for $ 4.1 billion (including net debt).
Like Morrison’s P2P, Ultra Electronics’ delisting caused a stir. Critics say the deal has the potential to undermine national security, while Morrison’s acquisition is seen by some to undermine the country’s food security at a time when supply chains are under immense pressure by because of Brexit and the pandemic.
At the onset of the health crisis, European countries, at the request of the EU, stressed the need to carefully consider foreign direct investments in strategic sectors considered essential for national security purposes. This is a concern that is felt in many markets. Germany, Canada and the UK have revealed new regimes to control critical investments.
The UK government released its National Security and Investment Bill in November, which introduces a new system for reviewing takeovers that may raise national security concerns. It is expected that between 1,000 and 1,830 transaction notifications will be triggered each year. This is a significant increase from the less than 100 agreements that the Competition and Markets Authority is currently reviewing.
The United States is also vigilant, despite previous expectations that the Biden administration may take a more lenient approach to inbound cross-border investment. Under former President Trump, the Committee on Foreign Investment in the United States has stepped up its efforts to filter deals, especially with regard to capital from China. Not only have tight controls continued under the current administration, but bipartisan support for the Strategic Competition Act of 2021 signals a continued consensus to oppose China’s efforts to undermine U.S. national security.
From a pure private equity perspective, increased transaction monitoring is likely to affect markets outside the United States more than the United States itself. Indeed, the majority of cross-border PE buyouts come from globally mandated funds based in the United States, and these are the richest sources of private capital equipped to achieve multibillion-dollar equity investments.
Given the value dynamics that are still at play and the dry powder reserves available for private equity funds, P2P is expected to remain a theme for the foreseeable future. But, depending on the industry in question, they could face greater regulatory headwinds than before.