U.S. buyout shops are less than $20 billion in deals away from their third record-breaking year in a row. As of the close of the third quarter, the year-to-date deal volume total for 2006 stands at a lofty $181 billion, a sum that was invested in 770 control-stake transactions. And if the deals continue to close at their current pace, then 2006’s deal volume total is sure to exceed the $198 billion invested in 840 control-stake transactions in 2005.
“Private equity is simply taking advantage of the vacuums left over the last few years by other asset classes,” says Steven Costabile, a managing director and head of the Private Equity Funds Group at
In the third quarter, U.S. private equity shops closed 259 control-stake transactions, putting a disclosed $56 billion to work in the process. While that dollar amount represents a drop from the $73 billion that firms put to work in the second quarter’s 250 deals—including the buyouts of Danish telecom provider TDC AS for $12 billion and of Dutch b-2-b publishing company VNU Group for $9.7 billion—it remains on par with with the $50-plus-billion deal pace that has consistently characterized every quarter since Q3 of 2005.
And looking back, last year’s third quarter was a substantial period in its own right. In those ninety days, a total of $57 billion was invested by U.S.-based PE firms in 191 deals, one of which was the $11.3 billion taking-private of SunGard Data Systems Inc.; that was the first eleven-figure LBO since RJR Nabisco, and the transaction that effectively kicked off the current string of mega deals that we’re seeing today (many of which have been agreed to over the past few months).
Among those is the proposed $33 billion buyout of HCA Inc., by
“It is true that there are very few firms that can be involved in an HCA or Philips Semiconductor [transaction], but they are still very competitive processes, and full and fair prices are being paid,” observes Bain Capital Managing Director Andrew Balson. “What you don’t see in that marketplace is 70 books sent out and 15 separate firms invited to take part in the advanced due diligence session.”
That’s certainly not to say that the PE marketplace is inhospitable to the mid-market players. One need look no further than
Gone are the days when firms could chart out their return expectations on a platform based on multiple arbitrage alone. Instead, buyout pros expect that, for the foreseeable future, they’ll follow the old-fashioned road to liquidity—finding quality companies, executing positive changes and increasing profits.
One pro notes: “We are exercising caution around the current economic environment and what might happen to valuations over time. We expect to sell our companies at a lower multiple than we bought them for, and we’re keeping that up front when we’re looking at deals.”
So what makes a good investments these days?
“Trying to explain what an attractive investment opportunity looks like in today’s market is a lot like trying to describe a beautiful woman; you know it when you see one, but there’s no cookie-cutter approach to it,” says
Sector-wise, buyout pros helped themselves to a smorgasbord of industries ranging from
Meanwhile, the absence of strategic buyers in the retail and technology markets have left those sectors wide open for private equity firms to swoop up those assets as well.
“I’d say retail, technology and media are the big money-grabbers of the day,” observes Marshall Sonenshine, chairman and partner of New York Investment bank
Where Things Stand
As it stands, the private equity market promises to see a lot more activity in the days to come, as more than $150 billion in deals is currently in the works and scheduled to close either later this quarter or in Q1 2007. But buyout pros have noted some changes in the market, which could signal that a slowdown is approaching.
T.J. Maloney, president of mid-market buyout shop
One large-market GP notes: “We’ve felt some effects with regard to the increase in interest rates, but so far it’s been more on the margin. We can’t borrow as much today as we did in the first quarter [of 2006], but I’d say things are still broadly consistent with where they’ve been the last few years.”
For sure, we’re not at the precipice yet, at least not according to private equity spending habits. Average purchase price multiples in both the middle and large markets are the highest they’ve been in 10 years—hovering around 8.6x—with equity participation remaining in the 35% and 31% range, according to Standard & Poor’s Leveraged Commentary and Data.
“It’s going to be benign, still waters for as far as we can see,” says Ray Whiteman, a managing director at the Carlyle Group and co-head of the firm’s distressed investing team. “We need volatility to make money and there’s just not a lot of that in the market right now. My view is to sit on the sidelines and wait for the storm to come.”