
Spending bottom dollar: Valuation gaps take Q1 buyout levels back to 2009

Private equity firms made buyouts totalling just EUR 9.9bn in Europe in the first quarter of 2023, according to Unquote Data.
With the year getting off to the slowest start in more than a decade, this figure marks a total not seen since Barack Obama was inaugurated, Michael Jackson was alive, and Sony sold 12m floppy discs in one year.
The year-on-year drop is also dramatic compared with 2022’s bonanza 1Q, when sponsors made buyouts worth EUR 69bn, according to Unquote Data.
Just 95 buyouts were made from January through March, three times less than the 324 made in the same period last year.
While difficulties in debt underwriting and a persistent buyer-seller price expectation gap were much discussed in 2022, 1Q23 has borne out the consequences of the rising cost of capital and widespread macroeconomic uncertainty.
“A combination of converging factors is suppressing activity but all are related to the uncertain economic outlook. The macro-economic headwinds that impacted activity in Q4, leading to an increase in broken transactions, remain," said Chris Goodgame managing director in Alvarez & Marsal’s Transaction Advisory practice.
"These volatile market conditions have also created a lack of clarity over valuations, with buyers and sellers often struggling to agree on a price. Large-cap, international and complex deals have been particularly affected," he added.
Large-cap woes
The market has seen a particular paucity at the top, with just CVC’s acquisition of Scan Global Logistics and Pemira's buyout of Acuity Knowledge Partners hitting an estimated enterprise value above EUR 1bn.
Large-cap processes for PE-backed businesses including BC Partners' VetPartners, Nordic Capital’s European Dental Group, and Partners Group’s Civica all being impacted by the macro environment.
Much like during the worst of the Covid-19 pandemic, the market is seeing a flight to quality, although best-in-class assets still have a significant premium attached.
“This is when LPs look to their GPs to really earn their money,” said Darius Craton a director with Raymond James Capital Advisory, adding that, especially in the mid-market, the best-in-class sponsors are now relying less on multiple expansion on exit. Instead, they are focusing on long-term growth potential through organic growth or scaling platforms through executing add-ons.
In spite of the slowdown in deployment, deals are still being done in growth markets, with funds like EQT Growth in full deployment mode. Situations where debt can be ported, such as continuation funds and minority stakes, are also attracting increased interest from sponsors.
These include the wide pool of sponsors circling a strategic partnership in life sciences group Qiagen's bioinformatics arm, TA Associate's minority stake in insurance broker MRH Trowe, and Hellman & Friedman's quest to sell a stake in Italian software provider TeamSystem.
Banking on a bounce-back
Many are loath to get out a crystal ball and predict when markets may return; however, some sponsors are warming to the idea of picking up the pace.
“Despite a slow start, activity is expected to resume in Q2 and accelerate as we enter H2,” said Thibault Basquin, Deputy Head of Ardian Buyout. “We anticipate that investors will have better visibility around the outlook for corporate performance and macroeconomic factors and be better able to take decisions. Sellers’ and buyers’ expectations around valuation and deal terms will also have had more time to converge.”
Just some of the private equity auctions in the pipeline include Bridgepoint's software testing company Qualitest and information intelligence group PEI Media, as well as PE-backed aircraft maintenance group Sabena Technics.
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