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Dealmaking slowdown leaves private equity with record unsold assets

Bain & Co report reveals how rapidly the industry has grown as well as the challenges created by higher interest rates

Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn, as a sharp slowdown in dealmaking creates a crunch for investors looking to sell assets. 

The numbers, revealed in consultancy firm Bain & Co’s annual private equity report, show how rapidly the industry has grown over the past decade, as well as the challenges it faces from higher interest rates that have increased financing costs. 

“It may be another two to three years before the money starts to come back [to investors],” Hugh MacArthur, chair of Bain’s private equity practice, told the Financial Times. “It’s probably the number one concern in the marketplace right now.”

Last year, the combined value of companies that the industry sold privately or on public markets fell 44 per cent on 2022 to its lowest level in a decade. 

The decline in value was even bigger where private equity firms sold portfolio companies to rivals, a practice that makes the industry look like a potential “pyramid scheme”, according to one critical investor.

The value of companies sold to other buyout groups fell by 47 per cent last year, with a mismatch in opinion over how much the assets were worth being the main reason why. 

More than 40 per cent of the companies waiting to be sold are at least four years old, the Bain report found, suggesting their owners should be getting ready to sell. Private equity firms generally own portfolio companies for three to five years, though in some cases it can be longer.

“Half of that $3.2tn should be in the window of being sold,” MacArthur said. “It’s going to be a multiyear issue.”

Private equity’s need for liquidity — to pay out investors that want to exit — is difficult to meet when assets are hard to sell.

This has prompted the industry to use alternative money-raising tactics, including “net asset value” financing — loans secured against typically highly indebted portfolio companies — and transferring companies to new internal funds. This can allow in new investors while others exit. 

NAV loans in particular are under more scrutiny from investors as they have become more common. The Institutional Limited Partners Association, an industry body that represents professional private equity investors, is working on draft recommendations to obtain more disclosure about when they are used and their risks. 

The problems buyout groups are having with selling assets is leading to a divergence in fortunes when they try to raise new money from investors. 

“It was truly a year of haves and have-nots,” the Bain report said. Just 20 funds accounted for more than half of the $448bn raised by private equity, with investors concentrating on firms with records of returning cash to their backers. 

The “secondaries” market — of private equity investors buying and selling existing stakes in funds and PE firms moving assets from older to new funds — was another bright spot. 

The amount of money raised in the secondaries market nearly doubled last year, with firms including Blackstone and Lexington Partners both raising more than $20bn each. 

There are also some signs that the traditional IPO exit route is making a comeback.

Last week, German beauty retailer Douglas, a business backed by private equity group CVC Capital Partners, announces plans to list in Frankfurt seeking a valuation of about €6bn. 

EQT-backed dermatology company Galderma also announced its intention to raise $2.3bn in an IPO on the Swiss stock exchange, at a valuation of around $20bn. 

There have also been a few examples of assets trading between peers including the sale of a stake in software company Cotiviti by Veritas Capital to KKR in a deal valuing the business at $11bn.

Companies have raised $3.2bn since January, more than double last year, but challenges remain

Europe’s market for initial public offerings has made its strongest start to a year since the pandemic, as new highs for stocks and the prospect of interest rate cuts raise hopes for a sustained recovery in listings.

Companies have raised $3.2bn in European IPOs since January, more than double the amount over the same period last year, a performance that puts the market on track for the best first quarter since 2021, according to data from the London Stock Exchange Group. 

The market was given fresh momentum last week after two private-equity owned companies set out IPO plans in a bid to take advantage of the more benign conditions.

Germany beauty retailer Douglas, owned by CVC, is aiming to raise €1.1bn on the Frankfurt stock exchange and is seeking a valuation of €6bn. Dermatology group Galderma, controlled by Swedish buyout group EQT, revealed it is seeking to raise $2.3bn in an IPO on the Swiss bourse.

“We are at the early stage of a recovery in the IPO cycle,” said Suneel Hargunani, the co-head of equity capital markets for Europe, the Middle East and Africa at Citigroup. “Confidence will build on a deal by deal basis.”

Management teams and bankers have taken confidence from several major European stock indices, including Germany’s Dax and France’s CAC 40, hitting record highs this year. The broad Stoxx Europe 600 index is up 5 per cent this year and has climbed by almost a fifth since the start of 2023.

With the exception of 2021, when the listings market on both sides of the Atlantic was galvanised by the effect of interest rate cuts, European IPOs have raised more this quarter than at any comparable point since 2015, according to LSEG data.

But bankers caution that IPOs will need to be well received if the market is going to build further momentum.

“Aftermarket and pricing success will contribute to expanding the pipeline but the sentiment is still somewhat cautious,” said Stephane Gruffat, co-head of Emea equity capital markets for Deutsche Bank.

Shares in two of the biggest European IPOs this year — German defence contractor Renk and Athens International Airport — have climbed since the companies listed last month.

There are several high-profile companies lining up to launch IPOs should the wider European stock market continue to head higher, an outcome analysts have said is more likely if the European Central Bank starts cutting interest rates. The ECB this week signalled June is the earliest it is likely to cut rates after it lowered its forecasts for inflation for this year and next.

Italian luxury sports shoe brand Golden Goose, owned by UK buyout firm Permira, and Puig, the Spanish beauty and fashion group behind brands including Charlotte Tilbury, have both signalled plans to list.

According to people familiar with the matter, private equity group CVC is also reviving plans for an IPO after postponing them last year. CVC declined to comment.

The German transportation start-up Flix, which owns the Greyhound brand in the US, is weighing launching an IPO as soon as June in Germany at a roughly €4bn valuation, according to people familiar with the matter. That would make it the first venture-backed IPO in Europe this year. Flix declined to comment.

“Volatility is low, markets have been fairly buoyant, inflation feels like it’s more in check and people are now fixed on rate cuts for June, and there’s a pretty big backlog,” said Lyle Schwartz, head of Emea equity capital markets for Evercore. “The dials are green and these well-telegraphed deals are smart to take advantage before things may get a little more volatile.”

Media and data group will develop its own technology and scoop up targets with AI capabilities

Thomson Reuters has an $8bn war chest to spend on acquisitions and investments in artificial intelligence, according to chief executive Steve Hasker, as it bets that the technology will transform rather than undermine its business of supplying information to lawyers, accountants and other professionals.

Talking to the Financial Times before this week’s investor day, its first for three years, Hasker said the group had “tremendous financial firepower” to expand across AI-driven professional services and information as it plans to sell the rest of its holding in the London Stock Exchange Group.

“We have dry powder of around $8bn as a result of the cash-generative ability of our existing business, a very lightly levered balance sheet and the sell down of [our stake in] LSEG,” he said.

Thomson Reuters also plans to spend more than $100mn on developing its own AI technology every year to serve customers in sectors such as legal, tax and accounting. 

Last year, the company completed a two-year programme designed to transform it from a content provider to a “content-driven” technology company. But Hasker said that, almost immediately after, “along came generative AI”, which he sees as again transformative for the group. 

The way in which AI would change its customers’ spending patterns remained “very unclear”, he said, but it was one of several “tailwinds” propelling the group.

Acquisitions would mainly be focused on companies with AI capabilities, he said. Over the past 18 months it has spent about $2bn on buying companies such as SurePrep, Casetext and Pagero, a global e-invoicing and tax solutions business.

Hasker said that about four-fifths of the group’s revenues came from the US, but it wanted to “rebalance” that over the next three to five years so was looking “fairly aggressively” at further growth in areas from Brazil and Mexico to south-east Asia and Japan.

He added that the company had struck “a number” of deals with AI groups seeking to use Reuters news to train their large language models. He declined to comment, however, about the commercial terms, saying that “there appears to be a market price evolving”.

“These models need to be fed. And they may as well be fed by the highest-quality, independent fact-based content. We have done a number of those deals, and we’re exploring the potential there.”

Hasker also declined to comment on a pending copyright lawsuit from Thomson Reuters against Ross Intelligence, an AI-driven legal research company, which is seen as a test case for other media content owners.

Thomson Reuters now employs about 26,000 people worldwide. The Thomson family own just under 70 per cent of the group, with the rest listed in Toronto and New York. The company’s chair David Thomson — Canada’s richest man with a wealth of tens of billions of dollars — heads the media empire founded by his grandfather Roy Thomson.

“[The family] are long-term holders. They’re happy with the performance of the business, both in terms of the dividends and the accretion in the stock price over the last number of years, so don’t intend to do anything but continue to support us in the long term,” said Hasker.

Thomson Reuters acquired its holding in LSEG when the financial services group bought its former financial data business Refinitiv for $27bn in 2019. It sold a 4 per cent stake worth £1.9bn last month in LSEG, and shares worth almost $5.5bn last year.

Hasker said Thomson Reuters would exit the stake entirely next year. “This was a financial stake for us, not a strategic position. The last part of the lock-up is in the first quarter of next year. So you’d expect us to be out of that position sometime around then.”

Last year, it launched new AI services — which allow customers to ask complex research questions and receive AI-assisted answers from authoritative legal sources — and Hasker said that it planned a further six to eight product launches in the next few months alone, “which is an unprecedented rate of innovation”.

Reuters news is now one of the group’s smallest divisions, generating about a tenth of revenues in 2023. Analysts have asked whether it makes sense for the news bureau to be part of a group now positioning itself more as a technology company for professional services.

Hasker was clear, however: “Reuters is not for sale. Reuters is an integral part of our portfolio.”

He said that its Reuters news bureaus also had access to its AI tech, and could already use an AI tool that helped create ideas for stories. “I’ve been here for four-and-a-bit years and we have worked really hard to make these parts of the business work together. It’s early days but the evidence is growing that there’s some really interesting benefits to be shared.”

Hasker said the group had looked at whether to create a paywall for the news service — with rivals such as Bloomberg charging high subscriptions for access to their data and journalism — but he added for now it was focused on serving LSEG, its largest customer, and agency customers.

He added, however, that the group was looking at whether there were linked news and AI products for professionals that could exist behind a paywall.

Sustained fall would raise questions over future ability of ambitious Chinese automaker to tap public markets

Two weeks after its shares began trading on the Nasdaq, Lotus Technology is down by two-thirds.

Yet far from being a surprise, the collapse has a familiar sensation for investors who bought into other businesses listed on global stock markets by China’s Geely. In recent years, the ambitious Chinese group has listed shares in Volvo Cars, Polestar and ECARX. All remain deeply under water.

The fall, if sustained, deals a hammer blow to one of China’s most ambitious auto groups, and raises questions over its future ability to tap public markets to raise funding as it pushes further into the expensive business of developing electric vehicles.

Shaun Rein, managing director of China Market Research Group, a Shanghai consultancy, said it was difficult to have a positive view of Geely’s outlook in the wake of the Lotus listing.  

“They don’t have a strong strategy internationally or in China, they have too many overlapping brands that just don’t make sense,” he said. 

The company burst on to the global stage with a 2010 deal to purchase Volvo Cars from Ford, kicking off a decade of expansion buying unloved international car brands including Lotus and taking stakes in Mercedes-Benz, Volvo trucks and Aston Martin.

Despite its dismal stock market record and increasing jitters about EV demand in western markets, the Chinese car group is doggedly pursuing public status for its other brands.

Geely has already filed documents for an IPO on Nasdaq for its new electric car brand Zeekr. At the same time it harbours stock market ambitions for a host of other businesses within its automotive portfolio, according to people familiar with its plans.

The share price performances of Volvo and EV brand Polestar already made it difficult to attract potential investors into Lotus, according to people familiar with the deal. Finding investors for Zeekr will be harder still if Lotus shares remain underwater for those who bought into the Spac.

The listings are more than just bragging rights for its ambitious founder Li Shufu, known internationally as Eric Li. As it grows outside of China, the company is having to jettison its historic reliance on domestic funding, and raise capital through western markets that are increasingly sceptical about Chinese businesses. 

“They will need a lot of money,” admits one current director within the wider business. 

This is particularly crucial as the business faces steep investment demands into electric cars, self-driving systems and software in the coming years.

Geely declined to comment for this article, but Daniel Li, chief executive of the Geely Holding Group, told the Future of the Car summit last May that “through the IPO of each individual brand, we can . . . get a good opportunity to provide a return to our investors”. However, he added the company did “not necessarily” need to list each entity it held.

That was all part of Geely’s long-term ambition, he said, to become a “top ten” global automotive participant and sell more than 4mn cars a year, something that would see it become larger than Nissan, Mercedes-Benz or Renault. Geely Holdings said it sold about 2.8mn vehicles across its brands last year. 

Bill Russo, the former head of Chrysler in China and founder of Automobility, a Shanghai consultancy, noted that choosing to fund businesses through public markets “means it doesn’t all have to come out of Li Shufu’s pockets”. 

Taking Chinese government or development agency money often requires building plants in the country. “When you go global you don’t get that same kind of support,” he added. 

Nevertheless, shares in auto businesses, especially EV start-ups, have cratered in the past two years as investors become less forgiving of unprofitable enthusiasm in an era of higher interest rates. 

“The over-exuberance . . . and listings of EV companies has [led to] capital destruction that is now catching up with companies which chose that route as the main source of funding,” said Russo. 

People familiar with Geely’s thinking say the company could easily raise needed finance through debt markets. “The reality is stock markets are more sophisticated and diverse outside of China, that’s why they’ve come to New York.” 

The company has also, they note, been a responsible custodian of struggling brands, especially Volvo and Lotus. Geely took a longer-term view of its businesses, something that short-term share prices did not reflect, they said.

Geely was “deliberately patient,” according to people with knowledge of its thinking. “These are not flip stocks,” said one person. 

Lotus came into the Geely fold in 2017, as part of a deal to invest in Malaysian owner Proton. After taking a 51 per cent stake, Geely poured £3bn into the once-sleepy business. 

Lotus chief financial officer Alexious Lee said the company’s target segment — buyers of electric vehicles costing more than $80,000 — was large and growing every year. “Lotus as an early mover will be able to capitalise,” he said. “We have a strong strategy, which we believe will deliver results and returns to shareholders and investors.”

Investors have awarded higher valuations to pure-play EV makers such as Tesla and the luxury-car maker Ferrari than to other traditional manufacturers. 

Lotus commercial head Mike Johnstone said investors were interested in the company’s “history and heritage”, which stemmed from motor racing. That, he believed, would help the brand stand out in a market increasingly saturated with electric SUVs all boasting sports car-like acceleration. 

The business has raised about $880mn from new investors, money that along with its $500mn cash will help the business until it becomes cash-generative next year, said Lee.

Lotus plans to produce electric SUVs at its new production line in Wuhan, in central China, that it believes will help it expand sales from just a few thousand to 150,000 by 2028. 

Despite the price performances of the listed shares, people close to Geely dismiss the price moves as short-term blips. “By the end of the decade, the direction of travel is pretty clear,” said one person. “The portfolio power of Chinese-controlled brands is going to strengthen.” 

If Geely wants to go global, it needs to press ahead with its flotation strategy. But the underperformance of its listed companies’ stock is hardly an incentive for international investors.

Tu Le, head of consultancy Sino Auto Insights noted that by listing its international brands Geely had gone from a fairly complicated portfolio to an extremely complicated one.

“The challenges are of their own making,” he said. “They have all of these brands now that they need to manage — many of them are foreign brands — this is new.”

Government is testing new trading market in drought-prone Cambridgeshire

Plans to cut radically household water usage in England are based on unrealistic projections that installing water meters will substantially drive down demand, former environment secretary George Eustice has warned.

Ministers have set legally binding targets to cut household water consumption per head by 20 per cent by 2038 in an effort to reduce shortages, which are holding up business and housing development.

However Eustice, who spent nearly a decade as a minister in the Department for Environment, Food and Rural Affairs, including two years as secretary of state, said a fundamentally different approach was needed to reach the targets.

“Current plans place far too much reliance on metering and behaviour change to meet that challenge,” Eustice told the Financial Times. “When you see some water companies suggesting that ‘gamification’ might help drive behaviour change, you know you have a problem,” he added. 

The comments came as the government unveiled plans to test a new water trading market, which would enable housebuilders to offset their water usage through the purchase and sale of “water credits” to ensure they have a neutral impact.

The scheme is being trialled in Cambridgeshire, where water shortages are holding up government plans to expand the city as a life sciences hub.

The Environment Agency watchdog has already blocked the construction of more than 9,000 homes and 300,000 square feet of lab space because of a lack of sustainable water supply.

The £9mn credit trading scheme, which was announced in the Budget, requires the establishment of a new market framework and operator, which would match buyers and sellers of water credits.

Water usage would be monitored by water companies through their meters, which are installed in properties, with the data checked by the Environment Agency and the new operator.

Eustice welcomed the Cambridge pilot scheme, which the government said had been primed with £4.5mn for retrofitting commercial and public buildings with water-saving devices, but said it reflected a wider failure of water companies to make good on their promises to deliver savings.

He added that a fundamentally different approach was needed to reach conservation targets in other regions or they too would face stricter controls on development, such as the “water neutrality” rules imposed on North Sussex where all planning applications must show they do not increase water consumption. 

“Unless other policy levers get used in a timely way, you end up with water neutrality and water credits as a last resort,” he said.

The implementation of the scheme follows years of political friction between water companies, local government planners and environmentalists over management of the region’s water resources.

Clara Todd, founder of Water Sensitive Cambridge, a pressure group, said there was a lot of “speculation and uncertainty” over the proposals and as “with other environmental markets it could be open to exploitation”.

Cambridge Water said in its latest five-year plan that it was aiming to cut household consumption to 110 litres per person, per day by 2050, through a programme of installing meters. It calculated that on average using meters reduced household consumption by 13 per cent.

However, in its response Cambridgeshire Council was sceptical. “We believe this cannot necessarily be achieved through ‘smart’ metering and educational work alone,” they wrote, adding there needed to be more investment to retrofit homes with water-saving devices.

In Cambridge, plans for a water transfer pipeline and a reservoir are not due for completion until 2032 and 2036, respectively, meaning water-saving measures are required to deliver additional capacity in the interim.

The National Infrastructure Commission, which advises the government on infrastructure, said in 2018 that the UK would need between 2.5bn and 4bn litres of additional water capacity in England per day by 2050 to maintain current levels of service. It supports the compulsory rollout of water meters.

Around 60 per cent of UK households have water meters, but only 3 per cent have smart meters that provide daily updates on usage. The rest are billed based on property values from the 1970s.

Water companies are planning to increase installations sharply over the next five years; they claim it helps them tackle leaks as well as raising consumer awareness on consumption.

In some water-stressed areas such as London, meters are already mandatory although social campaigners have raised concerns over the impact on large families on low incomes. 

The Consumer Council for Water, a public body representing consumers, said that while it supported the installation of smart meters, it agreed they “wouldn’t deliver the demand reduction required”.

“Companies’ plans are light on how they will actually help customers change their behaviour to reduce their water use,” it said.

Lucy Nethsingha, Liberal Democrat leader of Cambridgeshire county council, said that water companies had a poor record of delivering on their promises. 

“Most companies do the minimum government regulation allows, that is how they are set up. The problem is that regulation has been far too lax ever since privatisation, and that privatisation itself has failed,” she added.

Water UK, which represents the water companies, said: “Metering is only part of the solution. Most importantly, with rising temperatures and population, we should never again see the government block a reservoir because there is supposedly ‘no immediate need’.

“We are already having to play catch-up, with vital housing and economic development now being held back,” a spokesperson said.

Cambridge Water did not respond to requests for comment.