2020 still offers private equity investment hopes - comment
These findings are part of Pinsent Masons’ annual review into deal terms and trends in the merger and acquisitions (M&A) and private equity (PE) markets. The report provides insights gleaned from 190 UK-led transactions that Pinsent Masons, Howden M&A and Arrowpoint Advisory advised on in 2019, which together were worth a total of £12.5 billion.
The advent of the Covid-19 virus, and what looks like a potentially difficult post-Brexit trade negotiation with the EU, means buyers and sellers will continue to face significant uncertainty and deal volumes are likely to be suppressed. Obviously, we are in uncharted economic waters. At the same time, reports suggest the global private equity industry started the year with dry powder of in excess of $1.5 trillion ($1.2tn).
In the short term, private equity funders are focusing on managing their existing portfolio firms, particularly as they navigate their way out of lockdown, but later this year we anticipate private equity will look to take advantage of pricing adjustments borne out of the current economic crisis by targeting public-to-private transactions and private company acquisitions.
Where activity is continuing, this is typically in what are seen to be more robust/less affected sectors such as IT and infrastructure. Our PE M&A Report 2020 found that despite “testing” economic conditions, and political uncertainty, there were strong levels of M&A activity, particularly by private equity houses or private equity backed companies in 2019.
Our experiences in 2019 indicate that a strong asset in the right sector will interest hungry private equity and trade bidders. Private equity bidders in particular showed a strong appetite to compete, and pay full prices, for the right assets. Primary buyouts in 2019 were at their highest level, as a proportion of deals surveyed, since we began our deal trends reporting five years ago.
This is particularly refreshing as it demonstrates that deal origination activities remain strong and a growing range of businesses are getting access to private equity firepower and expertise. We anticipate that, once we are through the current deal-making hiatus, these trends will continue during 2020, though we may also see suppressed valuations that could attract distressed and special situations funds.
Later this year we anticipate private equity will look to take advantage of pricing adjustments borne out of the current economic crisis. The report identified a decline in the popularity of “material adverse change” (MAC) clauses in sale agreements. MAC clauses commonly provide leeway to buyers to reduce the amount they must pay to acquire target companies where events come to light that damage the target company’s financial position or prospects.
The reduced popularity of MAC clauses is not particularly surprising. They present significant transaction uncertainty. As debt lenders re-assess their approach to equivalent clauses in their lending agreements in light of Covid-19, it will be interesting to see whether they also become prominent in sale transactions in 2020.
According to the report, 35 per cent of private equity transactions analysed involved staggered payments in some form – “an element of deferred consideration”. We see the trend towards deferred consideration becoming more prominent in the post-Covid environment.
Whilst we do need to remember that our survey counts bolt-on acquisitions as private equity transactions, this does indicate that private equity bidders are prepared to supplement the potential offer of equity in their buyer group with consideration structures that drive appropriate behaviours and bridge gaps in price expectations.
Barry McCaig, partner and head of corporate in Scotland, Pinsent Masons
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