Privatizations: Big ambitions

No deal type expresses a PE firm’s ambition quite like a take-private. The financial position of a publicly-traded company is accessible to anyone who cares to familiarize themselves with an annual report, and these assets are – in theory, at least – available to any buyout investor with the means and motivation to pay the right price. If there is a surfeit of capital to be put to work, and a friendly financing environment, take-privates inevitably become popular targets.

PE investment in Asia reached a record $208 billion last year even as the number of announced deals came to a three-year low, according to the latest statistics from AVCJ Research. There were 33 transactions of $1 billion or more – compared to 17 in 2016 and 24 in 2015 – and they accounted for over half of the capital deployed. Of these, 17 were buyouts, including eight take-privates. 

The year bore witness to two privatizations that rank among Asia’s five largest-ever non-infrastructure buyouts by enterprise value: Global Logistics Properties (GLP) at $11.5 billion and Belle International at $6.8 billion. Six of the all-time top 10 also fit this deal profile, each one announced within the last three years. It reflects the fact that larger fund sizes, plus ample demand for co-investment, have allowed GPs to pursue transactions that were previously beyond their capacity.

This is not just an Asian trend. Bain & Company’s latest global private equity report notes that around 150 privatizations were announced in 2017, up from below 100 the previous year, while the total value of these deals surged 80% to $180 billion. Activity is still nowhere near the levels seen before the global financial crisis, but the take-private share of overall investment value is comparable: 41% in 2017 versus 53% in 2007; the 2012-2016 average is 23%.

It is no coincidence that the amount of dry powder globally reached a record $1.7 trillion last year, while ample supply of inexpensive debt has led to higher leverage levels. Buyout purchase multiples came to 11.3x EBITDA, also a record. As private market and public market valuations converge, take-private deals become even more likely.

Taking on investments at elevated valuations – or targeting assets because there is a need to put capital to work in a market, like Asia, where large-cap opportunities are still in relatively short supply – increases pressure on underwriting and value creation capabilities. Investors must do more to move the needle, particularly if the capacity for debt-driven multiple expansion becomes compressed. Otherwise, LPs must prepare themselves for lower return multiples from the top end of the market, if they haven’t already.

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• Topics
• Buyouts
• Buyout
• Performance
• Asia