Private Equity Will Go After Listed Companies. And Corporations Will Welcome It.

Private equity firms may take advantage of the downturn to build stakes in publicly traded companies, PitchBook predicts.

Illustration by II (Michael Nagle/Bloomberg)

Illustration by II

(Michael Nagle/Bloomberg)

Private equity funds hunting for deals during and after the coronavirus pandemic will likely turn to the public markets, according to PitchBook.

In a new research note, PitchBook analysts predicted that the health and economic crisis would cause an upswing in PIPE deals, or private investments in public equities. These deals — which involve publicly traded companies selling shares or convertible securities to private investors, typically at a discount price — are more likely to occur when “cyclical businesses look for cash when credit is hard to come by,” the analysts said.

“Many PE firms, such as KKR and Apollo, can invest quickly from their own balance sheets and may be able to secure substantial stakes in publicly traded firms, which tend to experience valuation declines more quickly and more severely than those in private markets,” Pitchbook added.

PitchBook’s analysts don’t see many private equity funds attempting to take public companies private right now, “due to the difficulty of gaining shareholder and regulatory in such uncertain times.” However, stakes secured via PIPE deals could lead to eventual take-private transactions — deals that had already been occurring with increasing frequency prior to the market downturn. As of August, 2019 was on track to be the most active year for take-private transactions in the U.S. since 2007, according to Dealogic.

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“Though full-blown take-privates in the near term are unlikely… we are likely to see PE funds built toehold positions in publicly traded firms in preparation for take-privates once the dust settles,” the PitchBook analysts wrote.

Other opportunities that private equity funds might pursue in the near term — after shoring up their existing portfolio companies — could include growth equity deals. Like take-private transactions, these deals “had already been on the upswing” heading into the current crisis, peaking at 1,012 deals in 2018, according to PitchBook.

The data firm’s analysts suggested that growth equity deals could become “a much-needed source of financing in this difficult time,” and would allow private equity firms to “deploy capital at attractive prices without the need to secure new debt financing.”

Additional deal flow during and after the pandemic could come from “carve-outs and divestitures from conglomerates that were too acquisitive in recent years and are willing to part with non-core businesses in exchange for cash,” according to PitchBook.

Leveraged buyout deals, meanwhile, remain a “serious question” in terms of how they will be financed. “If past downturns are any guide, PE firms will use more equity in these deals to get them across the finish line,” the data firm’s analysts said.

In this area, private debt funds, especially direct lending funds, could prove to be a “saving grace,” according to PitchBook. With their $241.4 billion in dry powder to deploy, private debt funds could provide some of the necessary financing for leveraged buyout deals. But despite this additional source of funding, the PitchBook analysts expect to see a reduction in leveraged buyout activity, at least until market volatility subsides.