U.S. sponsors picked up the pace of deal-making late in the second half, but they still fell short of the previous year’s tally, when a year-end rush to beat tax increases gave an artificial boost to the market.
All told, U.S. buyout shops closed 1,259 deals in 2013 as of Dec. 10, down 20 percent from the full-year total of 1,565 deals in 2012. The deal market remains well behind the bumper crop of 1,605 deals registered at the 2007 peak.
Reviewing 2013’s deal count by quarter against 2012, the acquisition count fell to 330 in the first quarter from 348; dipped again in the second quarter to 290 from 342; rose to 390 from 374 in the third quarter and fell to 249 as of Dec. 10 versus 501 deals for the entire fourth quarter last year.
The sponsor-backed M&A pace, while healthy, remains relatively subdued for a variety of reasons: cash-rich strategics outbidding more cautious buyout shops; high prices convincing firms it may be time to sell not buy; and financially healthy Fortune 500 firms with little need to sell off assets. The rallying stock market, while great for sponsored IPOs and portfolio valuations, presents challenges for value buyers in the M&A arena.
In a sign of the times, one of the most prolific of buyout shops, Riverside Co, had bought 17 companies as of Dec. 17, down from 36 in 2012. The slowdown came even though its new flagship Riverside Capital Appreciation Fund VI LP fund hit its hard cap of $1.5 billion this year, part of an industry wide fundraising total of $171 billion, the fourth-best year ever.
One unwelcome upshot of the sluggish M&A market: the time between fundraisings may lengthen as buyout shops put their dry powder to work more slowly, forcing limited partners to ride out a longer J-curve while paying management fees to deal-shy GPs.
“Often we agree to a longer investment period to give a GP flexibility, but we’re not assuming that it actually takes five or six years to deploy,” said Susan Long McAndrews, partner at Pantheon. “You get into an elongated fund life, longer J-curves – which is not a great leading indicator of compelling net returns. The groups that we really like and have good success with deploy a fund in three years and then raise a modestly larger fund and stick to that deployment pattern. They typically have quick and easy fundraisings as a result.”
Blockbuster Deals
Mark Brady, global head of M&A for William Blair, said the year started off quietly since sponsors rushed their best deals out the door by the end of 2012.
”If you had a particularly high-quality asset in 2013, you probably didn’t launch the sale process in the first two quarters of the year.” Brady said. ”From a deal-closing perspective, there was a slowdown in closings in the first and second quarters this year, and then things sort of picked up. Technology and healthcare were neck-and-neck as our busiest sectors at William Blair this year.”
Lifted by two of the year’s biggest deals—the $27 billion LBO by Berkshire Hathaway and 3G Capital for Heinz and the $19.3 billion take-private deal for Dell Inc by Silver Lake and Michael Dell—disclosed dollar volume rose to $139.6 billion as of Dec. 10. That was up 23 percent from last year’s full-year total of $113.9 billion.
The fourth quarter’s disclosed dollar volume on closed deals totaled $39.5 billion as of Dec. 10. That’s up from $23.7 billion in the third quarter but down from $42.6 billion in the year-ago period.
With smaller add-on deals remaining in favor, only a few large purchases outside of Dell contributed to the dollar volume for closed fourth-quarter deals: the $6 billion acquisition of high-end retailer Neiman Marcus by Ares Management LLC’s and the Canadian Pension Plan Investment Board from sellers Leonard Green & Partners LP, TPG Capital LP and Warburg Pincus; also Hellman & Friedman’s $4.4 billion deal for financial firm Hub International.
Only five 2013 U.S.-sponsor backed buyouts topped $5 billion, including Heinz and Dell, with the $6.5 billion deal by Bain Capital for BMC Software Inc ranking third. Indeed, the middle market drew strong interest from both large and mid-sized buyout firms, partly because acquisitions of that size are easier to exit down the road, and limited partners like them.
“To me, the middle market is redefined,” said Alison Mass, co-head of the financial sponsors group at Goldman Sach’s investment banking unit. Sponsors in 2013 had an affinity for acquisitions in the $600 million to $2.5 billion range, she said. ”The LPs are more comfortable with a more moderate range in terms of market caps, said Mass. ”These huge, large companies…the exit opportunities are somewhat limited from a strategic point of view.”
Case in point: Bain Capital’s vintage 2007 Fund X did deals requiring equity checks of $250 million to $300 million, rather than the $500 million to $600 million checks executives had originally expected.
Private equity firms finished out the year “absolutely” shopping for acquisitions, William Blair’s Brady said. “That which was ripe they had already picked last year,” Brady said, referring to the large number of exits by sponsors. “Now with what’s going on in the debt markets, which have gotten better, and the improvement in the equity markets, they are very focused on deals.”
Add-ons Take Lead
In a sign of the preference for smaller deals at lower prices, add-on deals began outpacing platform deals in 2013.
The first quarter of the year started out in the usual way, with 52 percent platform deals and 48 percent add-ons. But in the second quarter, 58 percent of deals were add-ons compared to 42 percent for platform deals. That trend continued for the balance of 2013, with 57 percent add-ons and 43 percent platforms in the third quarter and 52 percent add-ons and 48 percent platforms in the fourth quarter as of Dec. 10.
By contrast, 41 percent of deals were add-ons and 58 percent were platforms as of Dec. 10 of 2012.
Add-on deals dominated the M&A dockets of the fourth quarter’s most active acquires: Blackstone Group and Kohlberg Kravis Roberts & Co as of Dec. 10.
Among the 16 combined deals from the two large private equity firms,10 were add-ons, six were platforms, and only one of the deals topped $999 million: KKR’s $1 billion platform purchase of industrial firm The Crosby Group LLC. KKR’s short list of other closed platform deals included Acco Material Handling Solutions LLC and Mitchell International Inc. Its add-ons included $22 million for Lightyear Network Solutions LLC; Bend Research Inc, EnRisk Services Inc, Hedef Alliance Holding AS and Perka Inc.
Blackstone Group’s $580 million deal to buy the Wish-Bone salad dressing business from Unilever as an add-on for its Pinnacle Foods platform ranked as its largest closed deal in the fourth quarter as of Dec. 10. The New York-based buyout shop purchased only three platforms: Asclepius Global Ltd, Lendmark Financial Services and Multi Corporation BV. Along with its Wish-Bone deal, Blackstone’s add-ons included Concorde Opera Paris; $12 million for the structured settlements busines of Imperial Holding Inc; Rana Confectionery Products Factor Co and Relthy Laboratorios Ltd.
These relatively modest purchases for firms with tens of billions of dry powder could reflect discipline on purchase price multiples, which increased only modestly in the quarter. In 2013, purchase price multiples for sponsored deals rose to 8.8x EBITDA as of Nov. 13, up from 8.5x EBITDA in the third quarter but only slightly ahead of 8.7x in the year-ago period, according to S&P Capital IQ.
Sponsors were willing to write bigger equity checks for deals, with equity levels rising to 34.7 percent as of Nov. 13, up from 30.5 percent in the third quarter, but down from 38.9 percent in the year-ago period, according to S&P Capital IQ.
Among sectors, industrial deals drew the most traffic in the quarter with 60 U.S.-sponsor-backed deals, followed by 39 high technology acquisitions, 34 in the consumer products and services sector and 22 in health care.
Refusing To Pay Top Dollar
Private equity executives said they avoided auctions whenever possible during the quarter.
“When the strategics play hard in an auction and have real synergy opportunities, itcan make it difficult for private equity firms,” said Barry Curtis, a Deloitte senior partner who works with buyout firms.
In a quest to find its own deals outside of the investment bank auction process, Coral Cables, Fla.-based Trivest Partners LP has thrown in a three-year lease on a luxury Mercedes S-Class along with the traditional 1 percent plus $100,000 fee for a successful introduction to a target firm.
“We’ve given away over a dozen of the cars and have photos of the various brokers standing next to their Mercedes outside their offices,” said Todd Jerles, a principal at the mid-market buyout shop. “It’s a unique incentive we provide to our deal sources and is one element that has helped drive a nice, steady deal flow, certainly this year.”
All told, Trivest Partners has made nine acquisitions and one exit in 2013 as its busiest year in its 32-year history. All nine acquisitions Trivest completed in 2013 were founder-owned.
Charlie Ayres, partner and chairman of Trilantic Capital Partners’s executive committee, said the firm remained active with four new platform deals in 2013.
Trilantic Capital committed about $150 million in equity each to acquire Templar Energy LLC and Trail Ridge Energy Partner II LLC, both domestic upstream oil and gas firms, plus about $90 million in equity for Traeger Pellet Grills LLC, a rapidly growing maker of wood pellet outdoor grilling equipment and related products. It also bought Addison Group, a temporary staffing provider. The two energy deals were purchased outside of a traditional auction and the two others were negotiated directly with company owners.
“Because we’ve been able to stay out of the auction market—which has driven values to the highest levels in the last five years—we feel we’ve been able to buy well,” Ayres said. Trilantic Capital’s four North American platform acquisitions from 2013 were all made from the firm’s new $2.2 billion fund, Trilantic Capital Partners V, which closed in December.
“The only thing you can’t change about a deal is what you pay for it,” Ayres said. “If you don’t make that mistake early on, it enhances the likelihood of a good outcome.”
Healthy 2014
Goldman Sachs’s Mass said she’s bullish on 2014, but not at the top end of the market.
“The impediment to a mega-deal is the size of the equity check and the fact that people are reluctant to do the consortium deals that they did in ‘06 and ‘07,” Mass said. “LPs don’t want 20 percent of a fund in one deal—they just don’t want to have that exposure. Never say never, but we’re not projecting…a $25 billion deal. Could there be a $10 billion or $15 billion deal? Absolutely.”
Meanwhile, this year’s strong exit model could set the tone for more M&A.
After exiting its stake in storage specialist Whiptail in a $415 million deal with Cisco Systems this year, growth equity firm Spring Mountain Capital LP remains in a buying mood.
“Currently, the most interesting growth-related opportunities that we see are in the health care, technology, software and Internet arenas,” said Jamie Weston, managing director of the firm’s private equity group. ”Growth, and the price you pay for an investment up front, helps mitigate some of the execution risks inherent in any investment you make. These sectors have the most interesting prospects for growth and value
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