More ‘shadow processes’, club deals in 2023 – WIPM Summit

With deal activity slowing, GPs are partnering up and ensuring that portfolio companies are agile and stress-tested, according to panellists from EQT, Eurazeo and Churchill Asset Management.

The private equity industry is set to see more club deals, shadow processes backed by corporates as well as greater focus on deal sourcing as volatility and disruption in the financing market continue into next year, a panel has heard.

Speaking at Private Equity International’s Women in Private Markets Summit in London on Wednesday, Amandine Ayrem, managing director at Eurazeo, noted strategic buyers, who have a lot of cash on their balance sheets, will pounce on deals as PE firms become more cautious about risk-taking.

“You see more and more shadow processes… as no one would take the risk to be ‘tainted’ in the market… Strategic buyers are still in the market right now and they even see some [attraction] in the fact that we are not so active or competitive,” Ayrem said.

That means GPs should prioritise the sale of their holdings that have some strategic interest, she added. “Right now, our job is to get super [paranoid] to make sure that our companies are agile and able to overcome next year, whatever it takes.”

For Churchill Asset Management managing director Anne Philpott, the difficult fundraising environment has resulted in a lot more of its US mid-market GPs “reaching out to LPs to right size and close transactions than what would have previously gone 100 percent to the funds”.

Phipott added: “We would frequently get calls from our sponsors ahead of a process and they’ll say, ‘what would your mezz read be on this deal or would you provide a co-investment on this transaction?’ It’s almost like a shadow process in some ways to gauge LP interest… It’s just a little bit more collaborative I think than we’ve seen in prior years.”

Given the volatility in purchase multiples, GPs are also expected to do more consortium-type investments or club deals to close mega-deals, she noted.

Transactions are also taking longer to close due to extended due diligence processes, GPs’ flight to quality in asset-picking and sponsors wanting to take their time to make sure they have structured deals appropriately in purchasing the right assets, Philpott noted.

Companies that can afford to wait are not going to sell, which will result in a drop-off in volume of assets coming to market, Elly Thio, managing director at EQT, said on the panel.

“We’re seeing this as an opportunity to play offence in terms of the themes that we invest behind – in climate and nature – and to developing these secular mega-trends… to consolidate their market positions… through roll-ups,” Thio said.