CEPRES: Take-privates less risky than LBOs

Although 'take private' deals achieve lower average returns than private buyouts, a new study suggests, their performance tends to be less volatile and subject to lower write-off rates.

Delisting a company may carry less downside risk than acquiring a private asset, according to CEPRES, a Munich-based research provider.

In a study to be published Monday, CEPRES found that write-offs for “take-privates” were half as likely as for private buyouts. Average returns, although lower by a relatively small margin, also displayed lower volatility than those generated through classic LBOs.

“If you have a public company that’s been listed at some point and then becomes private, it will have a proven track record and business model. The evidence of write-off rates shows there’s less likelihood of absolute failure in these cases compared to the purely private buyout situation – where perhaps there is slightly less certainty about the business model of a particular company,” commented Christopher Godfrey, a partner at CEPRES.

Source: CEPRES 

There was another side to the story, however. The study showed the loss rate for take-private write-offs was on average higher than for traditional buyouts, and that targets for take-privates were generally bought at higher EBITDA multiples.

“When it comes to public companies, there is a relative level of additional information and additional exposure, so as soon as a possible deal gets out there, anyone and everyone can decide whether they want to pick up on that deal,” said Godfrey.

Take-privates were also found to be something of a “revolving door”, where an exit was comparatively more likely to be achieved by relisting the company than through a sale to trade or secondary buyers. Compared to traditional LBOs, more than double the proportion of companies that had been delisted were later exited via an IPO. That was probably a point in favour of take-privates, Godfrey said, because public listings are often allowed to achieve better returns than exits through private sales.

But he doubted whether that would lead the take-private trend to pick up in the near future. “It became very popular in the mega buyout days, when the big funds that had a lot of capital to deploy were struggling to find big enough private targets. But today, even if there’s still a lot of dry powder out there, I’m not sure the current credit environment will enable deals to be done at such high value without larger equity checks. This will vary regionally, for example the US has relatively more senior debt available than Europe.”

CEPRES is the former risk-related research arm of VCM Fund Management, a German fund of funds that later became part of Deutsche Bank Group. It spun out from its parent in 2010, and now provides its members with industry insights and bespoke reports. Its methods involve collecting information at the underlying asset level, from a database comprising 30,000 private equity-backed deals.

The specific subset used for this study focused on around 7,500 deals, 150 of which were take private transactions.