Private equity-backed buyouts still chasing 2007 peak

While not yet at pre-crisis levels, a recent study found buyouts are increasing in part due to secondary buyouts fuelled by funds needing to deploy capital.

Global private equity-backed buyouts maintained a steady upward trend in the first half of 2010 with activity up 40.4 percent compared to the same period last year, according to a study by data provider mergermarket.

There were 37 buyouts with a deal value greater than $500 million announced during the first half of 2010, up from 39 for all of 2009. However, the recent resurgence in activity is well off the H1 peak achieved in 2007 of $570.7 billion.

The largest buyout in H1 2010 was agreed by the Blackstone Group, Paulson and Centerbridge Partners, which won a bankruptcy battle for hotel chain Extended Stay with a $3.9 billion bid.

The business services sector proved most active in the first half the year, grabbing 17.1 percent of all buyout deals reported. Compared to 2009, the only sectors to undergo reduced activity were financial services, energy, mining and utilities.

One of the strongest drivers of the increased buyout activity came from the secondary buyout market, which increased six-fold compared to H1 2009 at $22.6 billion. The trend may be set to continue: BC Partners and Silver Lake recently acquired healthcare services company MultiPlan from The Carlyle Group and Welsh, Carson, Anderson and Stowe for $3.1 billion, the second largest deal between financial sponsors in 2010 thus far.

Reasons for the increase in activity relate to both a more stable market compared to the last two years and the need for general partners to deploy the vast amount of unused capital committed in peak fundraising years prior to the credit-crunch, according to Fay Sanders, EMEA-focused private equity researcher at mergermarket.

‘‘In 2008-09 a lot of fund managers waited for markets to reach a new equilibrium, buyers and sellers were at a fundamental disagreement on what constituted a fair price,” Sanders said. “2010 is proving more conducive to deal activity as the pressure for funds to deploy capital increases.”
If general partners are unable to sell by the end of a fund’s life-cycle, or unable to buy before the first five years of a fund’s investment phase expires, she noted, they stand to lose out on management fees.

‘’Some of the larger buyout funds raised in the pre-crisis years are facing increasing pressure to invest their commitments this year and next, so as to avoid returning non-invested capital to their LP investors and foregoing management fees on  this un-invested capital. Secondary buyouts provide a neat way of securing investment for acquisitive funds and ensuring healthy exit multiples for funds coming to the end of their lifecycle,’’ said Sanders.