It’s peak time to take companies private.
So far in 2019, there have been $69.6 billion in deals involving public companies being taken private by U.S. private equity sponsors — up from $54.3 billion for all of 2018, according to Dealogic. If the pace of dealmaking continues, it will be the most active year for take-private transactions in the U.S. since 2007, the financial analytics firm said.
This year has also been the most active since 2007 on a global basis: According to Dealogic, $105.5 billion in take-private transactions have been announced globally so far this year, compared to $106.6 billion in all of 2018. In 2007, $329.7 billion in deals were announced.
The speed at which companies are going private is being driven by a number of factors, including private equity firms needing to put the record amount of capital they’ve raised over the last few years to work. Management teams and founders also increasingly want to avoid the demands put on public companies.
“In the tech space in particular, there’s the opportunity to take some legacy companies private and get them away from quarterly scrutiny,” said Peter Witte, associate director of private equity at EY. “But more broadly, it’s an opportunity to put large amounts of capital to work relatively efficiently,”
Witte explained that historically public companies traded at a valuation premium relative to companies in the private market. The premium has narrowed, however, as the private markets have been flooded with cash from investors, he said.
According to Antoine Drean, chairman of private equity fund advisory Triago, “the stars are also aligned for take-private deals” on a relative valuation basis.
“For the past couple of years, we’ve been in only the third period ever where private market multiples exceed valuations in the public markets, according to a number of providers including Bain,” he said. The other periods were the late 1980s, and the run-up to the financial crisis in 2007 and ’08.
But Drean asserted that higher relative valuations may be more sustainable this time.
“The last five years have seen ever larger amounts committed to private equity, giving the asset category an unprecedented amount of firepower at a time when private equity general partners are becoming more adept at generating value through operational change, buy-and-build strategies, and specialization,” Drean said. He noted that the capital that has been raised allows the industry to rely less on financial engineering to grow companies, arguing that private equity firms’ operational expertise justifies the premium paid to public market valuations. “Even at higher prices, that emphasis permits private equity owners to generate more value than would have been created at these companies had they remained listed,” he said.
In one recent example of a take-private deal, ArchiMed, which focuses on healthcare investments, announced a deal to take international medical logistics firm Bomi Group off the public market. Denis Ribon, founding partner of ArchiMed, said more deals are planned, and the firm has hired senior managers with expertise in taking public companies private.
According to Ribon, the firm’s take-private strategy is driven in part by public markets, which aren’t always amenable to companies —even ones with healthy growth — that want to do multiple acquisitions.
“Generally speaking, public markets aren’t comfortable with aggressive buy-and-build strategies that require frequent capital injections,” he said. “In most cases, not all the time, private owners are better suited for backing these strategies than public markets.”
Public companies taken private will likely stay private longer than in the past, exacerbating the already declining number of listed companies. Improving businesses from an operational perspective and executing on buy-and-build strategies takes longer than the quick bumps obtained from financial engineering that private equity firms have historically engaged in.
“As a means of exiting companies, we’ll see sales from one PE firm to another steadily take market share from initial public offerings if prices paid in private markets remain above values in public markets,” Drean said.
But Ribon said capital from the public markets will still be needed for some companies. “At some point, even today, there may not be enough private equity money available for the next round of ownership for large-cap companies,” he said.