With a record amount of dry powder still on hand, watch for private equity firms to take more public companies private.
Just this week Blackstone said it would take real estate investment trust PS Business Parks private in a $7.6 billion transaction. Last week, technology firm Citrix Systems approved a take-private deal by Evergreen Coast Capital, the private equity arm of Elliott Investment Management, and Vista Equity Partners. In late March, Evergreen Coast and Brookfield Asset Management announced that they were taking the market measurement firm Nielsen out of the public markets for $16 billion.
The recent surge of take-private deals comes amid massive sell-offs that have created attractive valuations for deal makers. A number of the recent deals were helped along by a market that fell 13 percent peak-to-trough, according to EY’s latest quarterly report on private equity expected to be published Wednesday.
There’s also been a slowdown in mergers and acquisitions overall. EY reported that the total value of deals led by PE firms dropped to $221 billion in the first quarter, a 27 percent decline from the same period last year. The slowdown was largely “natural” given the stellar private market performance in 2021, according to EY private equity analyst Pete Witte. At the same time, take-private transactions represented $66 billion of the $221 billion, or about 30 percent. That compares with $52 billion in take-privates during the first quarter of last year, or 17 percent of total private equity deal value.
The geopolitical conflict in Eastern Europe and the uncertainties in the macroeconomic environment have put the brakes on aggressive dealmaking.
As a result, PE firms also are likely to explore opportunities in the public market through private investment in public equities (PIPEs). In the early days of the pandemic, for example, PE firms shifted to credit investments and PIPEs “with lending markets frozen and M&A activity effectively at a standstill,” according to the report. “Today’s environment is likely to see similar measures around strategizing for a market likely to be defined by different fundamentals than [in] recent years.”
“What we saw during the pandemic was that the public markets dropped about 40 percent over the course of a couple of weeks. That created a lot of opportunities for PE firms,” Witte told II in an interview. Some hard-hit sectors such as travel, lodging, and dining were revived by private equity capital in the second quarter of 2020, he added. These periods of increased volatility made PIPE transactions very attractive. “And it’s the same thing with take-private deals, where [PE firms] can take an entire company private at a compelling valuation.”
The rising interest in public markets also comes at a time when the exit environment has become heavily impacted by macroeconomic trouble. According to EY, PE firms made 296 exits in the first quarter of 2022. These were valued at a total of $109 billion, a 55 percent drop from the first quarter last year. Notably, exits through sales to other PE firms declined 15 percent in value, and exits through initial public offerings fell 94 percent in value from the same period in 2021.