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  • Writer's pictureMatthew Orbell

Unlocking Capital: The Surge in Private Equity Portfolio Company Acquisitions

The private equity (PE) industry is experiencing a surge in portfolio company acquisitions, driven by a confluence of factors. This includes a record high level of dry powder and a shifting focus towards smaller, more mid-market deals. Despite challenges posed by rising interest rates, geopolitical turbulence, and regulatory scrutiny, fund managers are strategically allocating capital to transform their portfolios and leverage growth opportunities.

Impact of the Economic Landscape on Private Markets:


With uncertainty being the bane of dealmaking, private equity continued to suffer in H1. Rising interest rates across the globe have impacted buyouts as debt financing becomes more expensive. In the first half of 2023 global deals generated $202bn in value, representing a 58% decrease compared to the first half of 2022*.


The significant drop exemplifies the fall in large cap deals by PE. This could be tied to the fact that banks, fearing economic uncertainty, have issued significantly less syndicated loans, a key component of large leveraged transactions.


Fundraising for private capital has also been hit, with a 28% decrease in annualised value compared with the full year 2022*. This slump in the private markets comes amid a resurgence in the public markets, with the S&P 500 up over 18% in the first half of 2023.


Mounting pressure on General Partners (GPs) to deliver:


One of the issues surrounding PE fundraising, which also took a hit in H1, is the build-up of unexited portfolio companies, with the majority of the $2.8trn unexited portfolio assets edging up against or past the typical five year exit time frame*. The value of these assets is a staggering 4x the amount held during the 2008 financial crisis*.


In a recent survey from Bain & Company, 60% of limited partners (LPs) expressed a preference for cash over rolling over into a GP-led secondary transaction*. This signals LPs' inclination for fund managers to focus on generating liquidity from portfolio companies rather than solely seeking higher multiples. There seems to be a growing sentiment that holding on to these assets may not be a wise move as it is unsure whether exit conditions will be meaningfully different over the next 6-12 months.


Mounting Dry Powder Inventory Levels:


The decline in dealmaking in the PE space has contributed to a record level of $3.7trn in private capital dry powder, of which $1.1trn is in buyout funds*. This surplus capital provides a strong incentive for fund managers to seek investment opportunities after a prolonged run of relative inactivity.


However, 75% of buyout dry powder has been raised in the last three years*. Therefore the vast majority is still relatively fresh. This detracts pressure from GPs to deploy it on new buyouts and enables them to focus on growing and exiting existing portfolio companies.


Emphasis on Bolt-On Acquisitions:


The factors affecting the decline in leverage buy-outs (LBOs) and exits combined with the high levels of dry powder have placed emphasis on bolt-on acquisitions of existing portfolio companies. The performance of add-ons held resiliently compared with declining levels in buyout transactions, and continued to gain an increasing percentage share of total PE deals. In the European buyout industry alone, 369 bolt-on acquisitions were made in H1, the third highest figure on record*.


These smaller transactions require less debt financing and offer an effective path to deploying capital productively, particularly in challenging market conditions. Smaller deals, such as these, are less affected by volatility, and as a result are often viewed as the staple of dealmaking.


Instead of taking one giant leap on their transformational journey, small to mid-market deals allow companies to take a series of small steps. The defining characteristics of a bolt-on acquisition are the strategic fit and complementary nature of the target company's business to the acquiring company's operations.


A Crack in the Door:


With inflation beginning to contract, a crack may be opening in the door to dealmaking. Furthermore, even amid the signs of struggle in fundraising, CVC has just closed its Capital Partners IX fund, raising a record €26 billion in just six months*. This outshines Blackstone's previous number one spot, who themselves just became the first alternative manager to surpass $1 trillion in AUM*.


The surge in portfolio company acquisitions, particularly through bolt-on transactions, highlights fund managers' resilience in leveraging dry powder effectively to optimise growth opportunities and reshape portfolios for sustained success. The PE industry's adaptability and focus on complementary acquisitions position it well to unlock capital and achieve long-term value amidst the evolving economic environment.

Sources

'Stuck in Place: Private Equity Midyear Report 2023'. Bain & Company. July 17, 2023.

'Global M&A Industry Trends: 2023 Mid-Year Update'. pwc. July 2023.

'McKinsey Global Private Markets Review: Private markets turn down the volume'. March 21, 2023.

'European buyout industry doubles down on buy-and-build amid wider market slowdown'. Equistone. July 18, 2023.

'CVC raises €26 billion for biggest buyout fund'. The Times. July 21, 2023.

'Blackstone cheers $1 trillion milestone'. Private Equity News. July 21, 2023.

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