PE firms seeking to capitalise on strong exit market

It's a seller's market.

That was the consensus of three participants on a panel about exit opportunities at the Wall Street Journal's Private Equity Analyst Conference in New York on Tuesday. Whether through sales of portfolio companies to corporate acquirers, initial public offerings or dividend recapitalisations, KPS Capital Partners LP co-founder and managing partner Michael Psaros, Welsh Carson Anderson & Stowe co-president Anthony de Nicola, and Riverside Company co-CEO Stewart Kohl were sanguine about the prospects for general partners to realise investments and return capital to their limited partners.

As it concerned buy side sentiment, “the assumption is we're in a no growth economy,” said KPS' Psaros. As a result, strategic buyers have moved to generate growth through acquisitions at a time when M&A valuations couldn't be more attractive to business owners.

“This is the golden age of strategic buyers,” Psaros said.

Interestingly, Psaros noted that in today's M&A environment a strategic acquirer's share price almost always increases upon the announcement of a new acquisition, reflecting the confidence public market investors have in acquisition growth strategies as compared with the deal boom era when a corporate buyer's equity value would generally decline after it had announced a new asset purchase.

Strategic M&A activity doesn't show much in the way of slowing, according to market sentiment.

An online poll in May by consultancy Deloitte of over 2,040 professionals amid a webcast event titled “Mid-Year Outlook: Balancing the Bullish U.S. Deal Market with Regulatory Pressure and Global Risks” found that 39.5 percent of respondents believed that deal flow involving U.S. companies would increase in 2015.

Kohl agreed, saying that the amount of inbound calls Riverside received from potential strategic buyers was robust. The co-CEO said the lower middle market-focused firm had sold 19 companies worth $2.5 billion in enterprise value over the past year. “It's a wonderful time to sell,” he said, adding that firm was on track to sell 15 portfolio companies in 2015.

Welsh Carson's de Nicola, meanwhile, said the IPO market had proved fruitful for the large cap buyout group with two public offerings of portfolio companies in 2014. The co-president said the IPO market also offered another advantage for financial sponsors in that a firm could simultaneously file with the Securities & Exchange Commission to take a company public, while also running a separate auction process or in industry parlance, a “dual track process.” The advantage in doing so is that a private equity firm could choose the exit option that offered the best value for the portfolio company. “Then, you've really got an interesting horse race.”

The panelists also noted that good credit market conditions were creating another good realization fairway for returning capital to limited partners: leverage recapitalizations, or whereby a portfolio issues new debt that is used to support a dividend to a portfolio company's shareholders.

On the M&A side, Kohl and Psaros noted that it wasn't just domestic strategic buyers that offered good buying opportunities. Kohl said Riverside recently sold its first portfolio company to a Chinese strategic buyer, while Psaros said KPS had sold three portfolio companies to Japanese strategic buyers.