The late-2022 rally in stock markets could have been expected to dampen the appetite for take-privates in private equity (PE) circles. However, that did not seem happen. Public-to-private (P2P) transactions show few signs of slowing any time soon following another busy few months.
There were 30 P2Ps in Q1 2023, worth a combined US$70.9 billion—almost triple the US$25.6 billion in total value of the 27 take-privates in the previous quarter—according to Mergermarket. This also represents a 12% increase on Q1 2022 and nearly double the volume; there were 16 P2Ps worth US$63.4 billion in the first quarter of last year.
While the S&P 500 was up more than 10% on its October lows through mid-May (and European equities have been running even harder), there have still been ample opportunities for sponsors, who have been unafraid to deploy large chunks of capital.
Case in point: Based on public reports, following a competitive process, turnaround and carve-out specialist Japan Industrial Partners and TBJH Inc., an indirect subsidiary of the firm, agreed to make a tender offer for Toshiba, which would see the conglomerate delisted from the Tokyo Stock Exchange. If consummated, the deal, valued at more than US$15 billion, would be the largest P2P recorded in Japan, the largest M&A transaction in the country thus far in 2023, and the largest P2P of Q1 2023.
Coming to America
Toshiba would be just one of two P2Ps in the top-ten for Q1 2023 involving targets outside the US, which, like last year, has seen the lion’s share of activity.
In the largest of these, software specialist PE firm Silver Lake Partners and co-investor Canada Pension Plan Investment Board (CPPIB) acquired tech company Qualtrics International for US$11.9 billion in March. After taking outside capital from Sequoia Capital, Accel Ventures, and Insight Venture Partners, the customer experience software company rode the surge in tech stocks during the pandemic with a long-awaited IPO in January 2021, only to lose around 75% of its share price value in two years.
Qualtrics International’s software is used by some of the world's largest companies, including Microsoft, Volkswagen and Samsung, to collect and analyze customer feedback and inform their user experience, strategies and product development. The market is expected to grow in the coming years, due to increasing focus on customer satisfaction and the rise of artificial intelligence.
Tech P2Ps are showing enduring appeal among sponsors. In May, Frankfurt-listed Software AG, whose share price halved through 2022, voiced its support for a revised offer from existing backer Silver Lake to the tune of €2.4 billion, after reportedly turning down an even better offer from direct competitor Rocket Software, a portfolio company owned by Bain Capital.
Third on the P2P deal list for Q1 is the US$8.1 billion all-cash deal offer made by Apollo Global Management and co-investor Abu Dhabi Investment Authority (ADIA) for Univar Solutions, a global chemical distributor to a wide range of industries, including food and beverage, personal care and industrials. The latter’s share price has fluctuated since listing in 2015, with US hedge fund Engine Capital last year urging a sale. German chemicals distributor Brenntag had previously been in discussions regarding a potential takeover but ended those talks.
More to come
It is impossible to say whether the abundant P2P flow of the past year will continue, but there are still deals to be had and PE funds are making these deals work despite challenging financial conditions.
Notably, take-privates tend to be large and often require sponsors to bring in their limited partners as co-investors. For example, both CPPIB and ADIA are backers of Silver Lake and Apollo. This is necessary because PE funds have limits on the deals that they can make relative to the size of their vehicles, to mitigate against concentration risk. These co-investor arrangements also give fund managers the extra firepower needed to execute bumper-sized P2P deals, which is even more necessary amid today’s decades-high debt financing costs.
There has been discussion of the denominator effect dampening appetite for new PE fundraises as LPs try to manage their PE exposure in line with allocation targets. In principle, this should apply to co-investments. However, recent deals involving major institutions suggest otherwise and recent stock market volatility notwithstanding, large North American pension funds and sovereign wealth funds have been looking to increase their PE weightings in their portfolios.
Contrarily, a return of an equity bull market would alleviate the denominator effect by increasing investor appetite for PE, but that would put more listed companies beyond the reach of PE funds—a catch-22.
The tech sector remains attractive—the Nasdaq 100 is still well below its all-time high despite the post-Q4 rally. NVIDIA Corporation’s recent run-up and its current eye-watering price-to-earnings ratio of more than 200x show the staying power of the sector and the unwavering belief among investors in the growth potential of technology, particularly as it applies to AI. Regionally, Europe also looks comparatively attractive, with stocks in the region trading at a price-to-earnings ratio of around 14x, well under the S&P 500’s circa 24x P/E ratio.
Sponsors are skilled at digging deep into markets to uncover opportunities. Time and again, the PE industry has proven adept at identifying inherent value. Public markets do not always recognize this value and, in most cases, it takes the active, operationally-focused ownership of a sponsor to help a business fulfill its true potential. No doubt there will be more bargains to be found.
