Private equity use origination programs to find deals
Justin Partington, global head of funds, Sanne, says there are many opportunities for private equity investors, such as private deals, succession planning, expansion capital, or mergers.
Tell us about the private equity business.
There has been considerable dry powder (cash reserves) in the private equity funds space since the post crisis pickup in 2012. While some fund managers have raised larger funds that led to strategy drift into larger deals with greater tickets, the majority of fund managers have had a disciplined approach to maintain fund size or to invest their larger funds in the sectors and company sizes that match their expertise. This has resulted in some larger PE buyout funds deploying cash into more deals. We’re also seeing appetite for more platform deals with subsequent bolt-on activity.
If there are very few potential targets, how do private equity firms compete for deals?
There are many opportunities for private equity investors, such as private deals, succession planning, expansion capital, mergers and other opportunities. PE firms can improve their competitiveness through active origination programs to source their own deals, particularly if those deals remain out of an auction process. More fund managers are investing in origination. Meanwhile, private equity firms are doing more to convince sellers that they are the right buyer including aligning culture and fit as well as vision for the business, introduction of their operating network to expand opportunities, and appetite for further additional investment.
If valuations are on the high side, what does this mean for the trust industry?
Valuations vary from sector to sector, though a higher valuation will put more pressure on synergies from the deal or additional financial and operational improvements to the business to achieve the target end result. Increasingly higher valuations in the fiduciary and administration sector could at some point price out some private equity houses and give an advantage to trade buyers where a strategic angle can permit a higher valuation.
Tell us about secondary deals – private equity buying and selling to private equity.
PE houses tend to have a sector specialisation and also a range of deal or ticket sizes, from small growth to lower-mid market to mid-market and up into larger buyout deals. Each sector has different skill sets, while a lower mid-market house might focus on succession planning and buying out founder-led businesses, a mid-market PE house may take a professionalised portfolio company and expand it internationally or by product line, and may also bolt on acquisitions. These can all add legitimate and significant value to the portfolio company without financial engineering, though the latter can further boost returns. One controversial area is the occasional sale of a portfolio company by one fund in a fund manager’s stable to a second fund managed by the same manager. This practice is under scrutiny and is rightfully less prevalent.
How would a bubble hurt the market? Is it simply inability to sell?
All markets are negatively affected directly or indirectly by a bubble. As PE holds assets generally for three to five years, this medium term timeframe can help to limit the immediate damage of a bursting bubble. Looking back to the last crisis as an example, buyer and seller expectations widened, deals did not get done at the same volume, and holding periods were extended. This did have some reduction in investor returns, though not a dramatic slump. More equity and less debt in deals meant for less leverage and also slightly lower returns.
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