Last year ended with private markets on fire, in a positive sense. Regulatory shifts and macroeconomic grey clouds, which over the summer seemed to promise a year-end hard stop to the frenetic deal environment, have failed to dampen the enthusiasm – for now, at least.
Carve-outs and innovative secondary structures helped firms navigate an increasingly complex world – one that may never be fully rid of covid-19 disruption – and will likely continue to do so in 2022.
Here’s a round up of factors that could shape this year’s deals, based on industry reports and views from market participants.
Carve-outs are alight
The number of private equity-backed carve-out deals in the UK jumped 27 percent to 14 in the past year, up from 11 the previous year, shows research from global law firm Mayer Brown. The phenomenon also remains very active in mainland Europe.
These deals enable the strategic seller to de-consolidate and receive meaningful proceeds, while continuing to participate in the upside value creation. The deals end up looking a lot like “continuation vehicles for corporates”, KPS Capital Partners founder Michael Psaros told Private Equity International earlier this month.
Carve-outs will likely continue to be used by strategic managers in order to realign their goals to focus on their core businesses, says Alvaro Membrillera, a partner and head of Paul Weiss’s London office.
“Private equity buyers serve as a safe pair of hands to take on these non-core assets for these strategic sellers and re-position these sold businesses, especially given the current regulatory environment.”
PE buyers are often putting a higher value on non-core assets than corporates because they tend to be better able to streamline the business, drive it into new markets or bolt it on to other businesses they may be buying.
PE firms are particularly well placed to manage the execution risk of complex transactions that carry a discount, Membrillera adds, as well as to provide the equity needed to accelerate the growth of promising companies realigning their business post-covid.
While 2021 may have been the year the continuation vehicle caught on in the mainstream, that does not mean there is no more room for the phenomenon to grow.
Most continuation funds use an intermediary to help find a price, but some transactions are pegging the price to prior minority stake transactions.
Take, for example, Centerbridge Partners and Vistria Group, which in November affiliate title Secondaries Investor reported were looking to sell a sizeable minority equity stake in healthcare firm Sevita, which would set the stage for a secondaries process for the provider of home and community-based specialised healthcare.
Several recent single-asset secondaries deals have had their valuations set by earlier minority stake sales. This is considered a strong mechanism because it gives the asset value market validation, as opposed to hiring one or more external firms to provide fair value assessments.
This transaction’s usefulness is not limited to secondaries transactions. Membrillera has seen a trend of PE clients moving into minority investments, especially in industries such as software, biotech and life sciences.
In November, the asset management and overseas investment arm of China’s Ping An Insurance completed a transaction to free up balance sheet capital, lifting assets into a new vehicle while taking on additional capital for new deals.
The investor closed two funds: Ping An Global Equity Selection Fund II and GP Opportunities Fund. The vehicles received commitments totalling $750 million from a group of investors, including Goldman Sachs Asset Management, Montana Capital Partners and Ardian.
The GP Opportunities Fund will make investments in secondaries and co-investment deals on the basis of Ping An’s relationships with western managers.
Despite facilitating a new competitor’s entrance into the market, the potential for long-term strategic collaboration on transactions between the groups involved was deemed constructive by investors.
This transaction has similarities with Mubadala Capital’s August deal, in which assets were sold to a consortium led by BlackRock, alongside a $400 million unfunded primary commitment to a fresh Mubadala fund.
While managing third-party capital does come with increased regulatory and relationship burdens to bear, there is a trend for large investors growing their asset management practices with third-party capital to free up balance sheet capital.