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Private equity executives are predicting a sharp increase in takeover activity as buyout firms that have held on to investments in the hope of higher prices finally begin to capitulate.
There has been a marked drop in private equity groups selling portfolio companies since a peak in 2021, as rising interest rates have made financing more difficult and hurt valuations.
Investors in buyout funds have begun to increase pressure on groups to sell long-held investments and start returning cash, however, forcing them to reckon with lower prices and lock in returns.
“Sellers have conceded to lower valuations and the pressure to meet a certain return on investment is ticking,” Pete Stavros, co-head of global private equity at KKR, told the Financial Times at the World Economic Forum in Davos.
Firms entered the new year sitting on a record $2.8tn in investments, creating what consultancy Bain & Co last year called “a towering backlog” of potential sales. Many private equity investors have begun to demand cash returns before they commit to new funds, increasing the urgency of asset sales.
“For the last 24 months, there has been a disconnect on valuation expectation between buyers and sellers. There is now a real sense of pragmatism setting in,” said Anna Skoglund, who leads the European financial and strategic investors group at Goldman Sachs.
Last year, Veritas Capital, the private equity owner of healthcare software company Cotiviti, agreed to sell a 50 per cent stake to Carlyle in a deal that valued the business at up to $13bn before the transaction collapsed. In December, the FT reported KKR was now in talks at an $11bn valuation.
Fundraising data suggests that the money once pouring into the industry has begun to dry up, compounding the problem for firms. The amount raised by private equity funds globally last year fell to a six-year low, according to S&P Global.
“For the alternatives business to work properly, there needs to be a flow of money back to [investors] for them to reinvest in the new generation of funds,” Skoglund said.
Some groups are sitting on stockpiles of cash after accumulating record amounts of capital they have yet to deploy, however, giving them an opportunity to boost returns through new investments.
Buyers were standing ready to strike a flurry of deals as prices began to reflect new realities such as higher financing costs and more uncertain economic conditions, said executives at some of the industry’s largest groups.
“This is a good time to lean in,” said Scott Nuttall, co-chief executive of KKR said. “There is less competition for deals and multiples have come down.”
Nuttall and other industry leaders expect funds that are just beginning to make new investments will be beneficiaries. “It is in periods like this where we have historically earned our highest returns,” said Nuttall.
Dealmakers forecast that asset sales between private equity groups will rebound particularly strongly. In recent years such transactions have accounted for about half of overall takeover activity, but “sponsor-to-sponsor” deals in the US dropped to their lowest level in a decade last year, according to data provider PitchBook.
“There will be portfolios that are more challenged and you will have private equity firms in decent shape ready to make bids for some of those assets,” said Rob Lucas, a managing partner of CVC Capital Partners.