Private equity firms are sitting on large stores of capital,
yet assets for sale have slumped. What are buyout fund managers
to do when investors press them to put capital to work?
One way firms are handling a record amount of dry powder is
by participating in competitive acquisition processes for
assetsthat is, auctions. Experts say these auctions, in
turn, tend to drive up valuations on assets.
With dry powder at an all-time high, we continue to
see robust demand for high quality companies in great
sectors, says Alex Panas, a senior partner at consultant
McKinsey & Co. in an email.
Nicholas Tsafos, a partner at accounting firm EisnerAmper
confirms that observation. Were definitely seeing
that theres multiple bidders involved, Tsafos says.
What we see in that situation is that the investee
companies have options.
A recent report from Preqin showed that private
equity-backed exits have been declining. At the same time, the
data provider has been reporting that fundraising by
private-equity firms is at a high since the financial
Preqin and other data providers do not track the number of
However, the latest round of megadeals confirms that
acquisitions have grown more competitive.
For instance, online retail giant Amazon.coms roughly
$13.7 billion proposed acquisition of Whole Foods Market
includes a competitive process. According to regulatory
filings, four private equity firms approached the upscale
grocer about a potential deal before Amazon swept in with an
And private equity firm Sycamore Partners announced it would
acquire Staples for $6.9 billion in late June a deal
that was also the result of a competitive process, according to
Meanwhile Toshiba is in talks with multiple firms, including
Bain Capital, over the sale of its chip unit. On June 28, the
company affirmed that talks are still ongoing.
With so much capital available, the pace of these deals
isnt likely to slow.
Larger deals always tended to have an auction
process, says Michael Pfeffer, managing director at Post
Capital. Over the past five or six years, its
The reason, according to Pfeffer: companies with $10 million
to $150 million in revenuethose in the lower middle
marketare also starting to participate in auction
processes. This, Pfeffer says, is a fundamental change in
Its very much a sellers market right
now, Pfeffer says. Valuations are high.
Panas agrees. Many sponsors are approaching auctions
with a clear value creation plan that will drive ongoing
company performance from day one, he says.
Pfeffer adds that an increase in boutique firms founded by
dislocated investment bankers, who are comfortable
with jumping into auctions, is also driving the rise in
Smaller firms are now familiar with the [auction]
process, he says.
Does this mean the biggest offer wins? Not necessarily.
Tsafos says he often advises clients to look behind the equity
or debt offered for an acquisition. Lets not just
look at the highest valuation we can get for the company,
he says. Which PE fund is giving us a fair valuation and
can provide guidance and growth for the future?