Take-privates boom amid the equity bear market

Private equity (PE) funds are taking the opportunity to delist high-quality tech businesses at marked-down prices

Global take-private activity ran hard in 2022, with 91 public-to-private (P2P) transactions worth an aggregate US$245 billion, exceeding 2021's record high of US$239 billion in deal value despite volume being down 29% year-on-year.

This performance was somewhat counter to PE activity in general, which saw a slower year for both volume and value in 2022. There were 2,845 deals worth US$568.6 billion, down 20% and 44% respectively, year-on-year—but both were still the second-highest volume and value levels on Mergermarket record.

North America has been the center of P2P activity, accounting for 62% of value and 45% of volume, which is a function of the US having the most populated and highly capitalized equity markets in the world. According to Statista, the New York Stock Exchange counted more than 2,500 domestic and international companies, while the NASDAQ carried over 3,700.

Of the top-ten largest P2Ps in 2022, all but one involved a US target. The one outlier was also the largest deal of the year and Europe’s largest take-private on record—Atlantia, the Italian motorways and airports group, was delisted from the Borsa Italiana in a US$46.4 billion buyout led by Blackstone Group and the Benetton family's investment fund Edizione.

Tech declines 

Technology, media and telecommunications (TMT) loomed large among the biggest P2Ps last year—eight out of the top-ten take-privates in 2022 involved TMT companies. This comes after a pronounced sell-off of technology-related stocks through 2022. The Technology Select Sector Index was down by around 25% year-on-year by mid-November (by February 2023, it was still down 11% year-on-year). Much of Big Tech has also seen large downdrafts—Meta, for example, was down by more than 66% that same month and is still down 17% year-on-year, despite rallying in the new year.

PE firms made hay while the sun shone in 2022, capitalizing on the rotation into value stocks, treasuries and cash holdings as interest rates increased.

The largest US take-private, in a deal valued at US$16.5 billion, involved Vista Equity Partners and Evergreen Coast Capital teaming up for Citrix, a cloud software-as-a-service (SaaS) company that provides server, application, and desktop virtualization and networking. Citrix has been merged with existing Vista portfolio company TIBCO, a data analytics business that helps its customers to predict business outcomes. Combining the two companies will join digital workspace functionality and real-time analytics into a single product that will benefit from hybrid working and ongoing enterprise digitalization.

Other standout TMT plays included Hellman & Friedman, Permira Advisers, the Abu Dhabi Investment Authority, and GIC Private paying US$10.2 billion for Zendesk, a SaaS customer support and sales business, and Thoma Bravo’s US$10.4 billion acquisition of Anaplan, which sells software that helps companies to plan, analyze and act on finance, supply chain and sales data to drive business performance.

The fact that Vista and Thoma Bravo, two software specialist PE firms, were responsible for half of the top-ten largest take-privates in 2022 is telling. SaaS has been a go-to sector for PE for years. Sticky recurring revenues from subscriptions align well with the industry’s leveraged financing model and companies continue to seek ways to optimize their operations to gain efficiencies, improve productivity and unlock growth. The pressure to achieve all of this in today’s inflationary, cost-sensitive environment is even higher.

Opportunities and challenges 

Going private can be hugely advantageous for companies languishing on stock markets. PE-owned businesses can take a longer-term view than their public equivalents. Away from the market’s spotlight, a sponsor can work with management to transform a business without the burden of quarterly reporting hanging over their heads. Private companies can cope with more radical operational reorganizations and strategic pivots that may not be well understood by public markets. These transfigurations may even be interpreted as value destructive in the short term, but ultimately deliver a stronger, more resilient and higher-growth company.

US PE funds are well positioned given the strength of the dollar. Reports suggest that US sponsors with dollar-denominated funds have been highly active pursuing companies on overseas bourses, such as the London Stock Exchange and European exchanges. Asset managers have been engaging directly with senior management to fend off what they see as lowball bids for companies in their portfolios. Resistance from key shareholders and boards means that PE will need to table realistic bids for listed companies to manage their execution risk. It won’t be a free-for-all but, until the next equity bull market begins, there will be ample opportunities for PE funds to deploy their dry powder in stock markets.

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