Private equity dealmaking defies pandemic to hit post-crisis high

The value of private equity deals this year soared to its highest level since 2007, roaring back from a spring slowdown as the industry snapped up companies in record numbers even as the coronavirus pandemic triggered a global recession. 

Buyout groups struck deals worth $559bn worldwide in 2020, rising almost a fifth from the previous year’s total, according to figures from Refinitiv covering January 1 to December 22. More than 8,000 deals were announced this year, the most since records began in 1980.

“Given the shock to the system we saw . . . the way M&A has snapped back more broadly, and for [private equity], has definitely exceeded our expectation,” said David Kamo, Americas head of financial sponsor M&A at Goldman Sachs. After the 2008 crisis “it took about two years to come back,” he said.

The spread of Covid-19 had threatened in the spring to bring a decade-long boom in mergers and acquisitions to a juddering halt. Private equity executives shifted their focus to shoring up hard-hit companies in their portfolios and large pre-pandemic deals, such as Carlyle’s acquisition of a stake in American Express Global Business Travel, were called off. 

The industry had seemed to be facing a year of reckoning, as firms’ often highly-leveraged portfolio companies confronted the worst economic outlook since the Great Depression. But enormous government stimulus packages and sweeping central bank crisis measures meant that, in dealmaking terms, the worst global pandemic since the Spanish Flu in 1918 did not derail activity. 

The Federal Reserve’s historic decisions to cut interest rates to zero and buy investment-grade bonds and exchange-traded funds that own riskier junk debt, gave companies a lifeline and ensured private equity’s continued access to cheap debt for new deals. Broader economic support measures meant firms could access bailout loans and furlough funds for portfolio companies. 

“Ultimately the lifeblood of private equity is cheap debt,” said Bryce Klempner, partner at consultant McKinsey. “When you’ve got the Fed saying debt will stay cheap for years, plus historically high multiples, the numbers look buoyant — especially if you’re a seller.”

Buyout groups took advantage of reduced competition for deals and of companies’ need to raise money in the crisis by putting units up for sale.
Joe Bae, co-president and co-chief operating officer of KKR, told the Financial Times in June that the $221.8bn buyout group was “capitalising on the unprecedented level of volatility and dislocation in the markets to buy high-quality businesses”.

The turmoil unleashed by the pandemic did little to bring down deal prices. The average valuation multiple for US deals between January and September reached 13.5 times earnings, the highest since Refinitiv began recording this metric in 2004.

The tech sector accounted for 28 per cent of all private equity deals by value as groups ploughed into companies that had prospered in the pandemic. The largest tech deal was Thoma Bravo’s purchase of RealPage, which valued the US property software group at $10.2bn.

Other megadeals in 2020 included Advent International and Cinven’s €17.2bn acquisition of Thyssenkrupp’s lifts business in February, and Walmart’s £6.8bn sale of UK supermarket chain Asda to TDR Capital and the brothers behind the petrol stations group Euro Garages in October. 

“What’s been impressive is how the dealmaking community has taken the pandemic in its stride,” said Sam Newhouse, a partner at law firm Latham & Watkins in London. “People basically paused, reassessed, recalibrated and carried on, arguably more efficiently — it didn’t stop them.”

The share prices of the large listed buyout groups have rebounded after tumbling in March, and Blackstone and KKR are trading at all-time highs. Low interest rates have created such demand for higher-yielding debt that private equity firms are increasingly able to load companies they own with fresh loans and use the money to pay themselves dividends.

Buyout groups are “pricing in a recovery that will be driven by the vaccine and there’s light at the end of the tunnel here,” said Goldman’s Mr Kamo. The rate of dealmaking had picked up partly because, with travel curtailed, advisers could work on more transactions, he added.

“All the factors that embolden private equity were still there: the large amounts of dry powder sitting on the sidelines, supportive financing markets, willing sellers,” said Mr Kamo. “The model doesn’t work if you don’t put the money to work.” 

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