Private equity flexes its muscles with $40bn of deals in a crisis
Move comes as many groups have expanded their operations beyond buyouts over the past decade
A band of PE dealmakers has had a busy few months
Way back in March, when mass working from home was a novelty and neat hair was commonplace, the impact of the coronavirus pandemic on global M&A seemed pretty clear.
“Dealmaking grinds to a halt on coronavirus impact,” read the FT headline on a March 31 story by DD’s James Fontanella-Khan and Arash Massoudi. Coronavirus had ravaged share prices and shifted executives’ focus towards saving their own companies instead of buying more.
But as the deal business was freezing up, one group of people were just getting started.
A handful of mostly US-based private equity groups have been striking deals at an aggressive pace for the past three and a half months, according to an analysis of Refinitiv data by DD’s Kaye Wiggins.
Between them, the top 10-ranking companies by deal count have announced acquisitions and investments worth more than $40bn since the beginning of March.
That’s more than a third of the $103bn that all private equity groups worldwide spent on acquisitions in the good times — the final three months of 2019. (The numbers include add-on purchases by portfolio companies, and some deals agreed before the crisis that managed to go through.)
KKR, whose $16.9bn in deals makes up a hefty chunk of the total, is “capitalising on the unprecedented level of volatility and dislocation in the markets to buy high-quality businesses at attractive prices,” said Joe Bae, its co-president and co-chief operating officer.
Bain Capital, the second most active group, is thinking back to 2008. “One of the most productive periods for us was after the global financial crisis,” said John Connaughton, its co-managing partner. While there’s no “top-down mandate that we’re trying to put more money to work in this environment”, Bain has been able to “find opportunities”.
Perhaps the ultimate Covid-era deal is EQT’s acquisition of the hand sanitiser producer Schulke in April.
Plenty of other private equity groups have had a quieter time on the dealmaking front, especially many European companies.
The fastest movers have often been those that spent the past decade expanding their operations beyond their roots in buyouts to include credit, distressed investing, infrastructure and technology funds.
Among the reasons for not jumping in quickly (apart from a need to focus on portfolio companies) is that deals aren’t actually that cheap, especially since stock markets have staged a rebound.
That means you’re often “pricing in a model of recovery that in reality is at odds with everything we are seeing in terms of [the] GDP impact from the shutdown”, one dealmaker said.
We won’t know for years whether the hares or the tortoises ultimately win the race. For now, read up on who’s doing what with Kaye’s deep-dive here.
Ebitdac to the future
Remember pubs?
This time last year, it was typical to find members of team DD enjoying a pint or two in one of those … after we finished putting together your favourite corporate finance newsletter, of course.
Yet, while spending evenings in the pub, making festival plans and packing suitcases for holidays are memories of past summers for most of us, some of the companies that would normally profit from those activities are still living in 2019.
That’s because businesses suffering plunging revenues due to Covid-19 are avoiding potential debt breaches by substituting last year’s profits in place of this year’s in the documents they present to their lenders.
DD readers are probably pretty accustomed to earnings related chicanery by now. After all, last month we told you how ebitdac — or “earnings before coronavirus” — had gone from a joke on finance meme Instagram accounts to an actual reported metric in several companies’ first-quarter earnings.
But the act of simply pretending that it’s 2019 still seems particularly divorced from reality.
And yet, DD’s Kaye Wiggins and the FT’s Nikou Asgari report that companies around the world are doing it, including the UK pub chain Punch Taverns, US events group Live Nation Entertainment and Hong Kong-listed luggage maker Samsonite.
So why are lenders allowing this?
The simple answer is that the alternative for bondholders — declaring a default and taking control of a load of empty pubs — is even worse. It seems that some debt investors have even more reason to hope that we’re all able to enjoy a beer together sooner rather than later.
Drug Royalty, for real
Pablo Legorreta left his investment banking job at Lazard in the mid-90s to become an investor. On the face of it, it was not the most unusual path. But instead of going on to buy companies or bonds or stocks, he picked another asset: drug royalties.
It was an asset that had not yet really turned into a security. But pills threw off cash and could be valued using the usual Wall Street techniques. And Big Pharma, biotech start-ups, hospitals and universities needed upfront cash.
Legoretta’s investment group, Royalty Pharma, has spent about $18bn since its 1996 founding in buying up royalty streams and wracking up an enviable investment record.
Royalty Pharma listed its shares this week and after popping 75 per cent in two days of trading, now boasts an equity value of nearly $30bn, cementing Legoretta’s status as a multi-billionaire.
As Lex explains, the company resembles a private equity group in many ways (and at $30bn, Royalty Pharma would rank as one of the most valuable in the world). The company’s executive vice-president and vice-chairman is Christopher Hite, a longtime healthcare banker at Citigroup and Lehman Brothers.
Buying a drug royalty stream is a wager about how successful a drug will be over time. Ironically, buyers this week of Royalty Pharma shares have shown more optimism about the company’s prospects than Legoretta.