Private equity M&A frenzy has cautious undertones

3 minute read

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LONDON, Oct 27 (Reuters Breakingviews) - Private equity dealmakers are in two minds. Buyout barons, led by titans like Blackstone (BX.N) boss Steve Schwarzman, are on track for a record year for takeovers. Yet they’re also offloading companies at a much faster pace than before. That adds a note of caution to the frenzy.

Schwarzman and his rivals bought American and European companies, like cybersecurity firm Proofpoint and London-listed UDG Healthcare, with a total enterprise value of $1.4 trillion in the first nine months of 2021, according to PitchBook. That’s more than the $1.3 trillion they spent in the whole of 2019. Yet so-called exits, including initial public offerings and outright sales to corporate or other private equity buyers, were $1.1 trillion over the same period, 70% more than in 2019.

Comparing the two figures is inexact, because they measure a company’s entire value including debt, and don’t distinguish between a buyout firm selling out in full or disposing of a small stake in an IPO. Even so, it’s notable that the value of exits is an unusually high 74% of what was spent on new purchases. From 2015 to 2019 the average ratio was 62%, according to Breakingviews calculations using PitchBook data.

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One explanation is that buyout groups are raising money faster than before. The average time between a firm closing a fund and completing the next one has fallen below 3 years, from roughly 4 years in 2016, PitchBook U.S. data shows. That creates a problem for the pension funds, insurers and state investment vehicles which put up the money. They’re sometimes being asked to commit to new vehicles before receiving the profits from the last vintage. Harvesting past investments therefore helps private equity groups restock their investors’ coffers.

Frothy markets are probably a bigger factor, though. The S&P 500 Index and STOXX Europe 600 Index are up 22% and 19% respectively this year. Tighter monetary policy could depress valuations, which in turn would dent buyout firms’ returns. Schwarzman and others have little choice but to keep putting money to work at high prices: buyout groups are collectively sitting on $1.8 trillion of unspent capital, according to Preqin. But the data suggests they’re even more eager to sell.

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- Private equity groups launched mergers and acquisitions worth $1.4 trillion in the United States and Europe during the first nine months of 2021, according to PitchBook data. The overall enterprise value of companies they sold over the same period was almost $1.1 trillion.

- Those figures include the whole enterprise value of a company even if the buyout group has only bought or sold a chunk.

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Editing by Peter Thal Larsen and Oliver Taslic

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