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 assets—that 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. “We’re definitely seeing that there’s 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 crisis.
Preqin and other data providers do not track the number of auctions.
However, the latest round of megadeals confirms that acquisitions have grown more competitive.
For instance, online retail giant Amazon.com’s 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 offer.
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 Reuters.
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 isn’t 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, it’s changed.”
The reason, according to Pfeffer: companies with $10 million to $150 million in revenue—those in the lower middle market—are also starting to participate in auction processes. This, Pfeffer says, is a fundamental change in private equity.
“It’s very much a seller’s 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 competition.
“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. “Let’s 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?”
