PIPEs, equity-only deals gain momentum

GPs are inreasingly employing non-LBO strategies in the US, including making distressed debt plays and PIPEs, Ernst & Young research has found.

The US private equity landscape has changed dramatically in the past two years, with firms increasingly turning to equity-only transactions including minority stake buys and private investments in public equities (PIPEs), according to a study by Ernst & Young.

Last year, private equity firms accounted for 11 percent of the US PIPE market, up from just 4 percent the previous year. Private equity deal value in US PIPE deals also rose more than five times last year to $19.1 billion.

PIPEs continue to be popular today, with BC Partners recently paying $350 million for a 20 percent stake in listed US company Office Depot, and just today Warburg Pincus said it agreed to invest $115 million for a 15 percent stake in publicly traded US bank Webster Financial.

Last year, firms did 273 minority deals in the US, up roughly 29 percent from the prior year, Ernst & Young found. Apax Partners' chief executive recently wrote in the firm's annual report that this trend is set to continue, and in fact, last week Apax inked a $571 million all-equity deal for financial website Bankrate.com. Another recent all-equity transaction was done when Pamplona Capital Management bought TMD friction, a German auto parts maker, out of bankruptcy.

Loan-to-own deals, when investors purchase bonds of distressed companies at a discount and convert the debt to equity during the restructuring process, were also found to have become more common place last year. Oaktree Capital Management specialises in such deals, a good example of which was late last year when it bought bankrupt food products distributor Pierre Foods’ debt for less than $200 million and took control of the company as part of the company’ reorganisation plan.

These are among the ways GPs have sought to deploy capital as financial conditions continue to challenge deal making. Last year, 1,072 US private equity deals were closed, a 30 percent drop from the previous year. In the first three months of this year, 185 US private equity deals netted $5.5 billion, the lowest reported quarter deal value in 10 years.

US deal value, meanwhile, plummeted nearly 82 percent, year-over-year, to $77.4 billion last year, while the average deal size in the first quarter of 2009 was $58.2 million – nearly a threefold drop compared to the same period last year and nearly 15 times lower than the same period in the preceding year.