Private equity to private equity deals, whereby groups sell UK companies to each other, have jumped by 44 per cent in the past year, as firms rush to please investors and deploy capital accumulated during the coronavirus crisis.
The number of so-called “PE to PE” deals increased by 44 per cent to 85 in the past year, up from 59 a year earlier.
And private-to-private deals have accounted for a growing proportion of all private equity deals, rising to 26 per cent this year compared to 19 per cent last year.
One such deal that grabbed investor attention last October was US giant The Carlyle Group’s acquisition of a majority stake in UK blockchain funds network Calastone for an undisclosed amount from venture capital houses Accel and Octopus Ventures.
Private equity houses are sitting on a hefty $2.3 trillion dry powder cash reserves, according to data from S&P Global, after pandemic restrictions halted various parts of the economy.
A fair amount of this cash was accumulated in the first nine months of the pandemic, when it stood at $2 trillion in December 2020 – a steep rise from $1.6 trillion dry powder in December 2019, pre-pandemic.
Now, as the economy opens up, PE firms are under pressure to shed the cash from institutional investors seeking returns from an asset class that has performed well in recent years.
And firms are looking to each other as a way to complete deals quickly and with less friction than going straight to other companies. This might involve smaller PE firms selling portfolio companies to bigger peers, to guide them in their next stage of growth.
“Doing a deal with another private equity firm can be a lot easier than negotiating with a trade buyer, where it’s a completely different dynamic,” said James West, partner at law firm Mayer Brown, who analysed the Mergermarket data.
“There are usually more hoops corporates need to jump through to reach and approve a deal, and a lot more due diligence, particularly if they’re looking at synergies. Those factors can slow down deals significantly and make them less attractive to some PE vendors,” West said.
Seamless, rapid deals are such an attraction for PE firms under investor pressure that in some cases, they trump bigger potential returns.
“PE firms might feel doing deals with their peers is a simpler solution than negotiating with non-PE buyers, even if the price is lower,” West added.
The wide variation in PE funds’ investment goals and management structures mean there are plenty of opportunities for funds to partake in deals for companies at different stages of growth – and selling to each other facilitates this lifecycle.
Lower mid-market houses tend to acquire companies at an earlier stage of growth, where they require significant investment to grow.
Then, after developing a company’s business model and operations, a smaller firm might sell to a peer that invests in larger companies and can scale by, for example, taking it to different global markets.
On the contrary, a long heated takeover battle came to a head this weekend that saw US private equity firm CD&R and a consortium led by Softbank-backed Fortress pitch against each other since June for Morrisons.
CD&R came out on top, nabbing the UK’s fourth-largest supermarket for £7bn after an auction process on Saturday that saw Fortress lose out by a one pence per share increment.