Why GPs are less bullish on P2Ps since covid-19

Public-to-private deals will be difficult to execute in the short term with publicly traded companies having less visibility on revenues, says Investec’s head of PE client group.

Private equity managers’ appetite for public-to-privates has waned since the start of covid-19, a study by Investec has found.

The bank’s Global GP Trends Report 2020 revealed that PE managers’ bullishness towards P2Ps has declined significantly – 14.3 percent of GPs thought P2Ps had 12 months or less to run before covid-19. Since the pandemic roiled global financial markets, almost double that number (27 percent) expect the the trend of more P2Ps to reverse.

This contrasts with increased P2P activity in Europe last year. European PE-backed P2P deal value at the end of 2019 reached €34.5 billion, up 14 percent on 2018’s full-year figure of €30.3 billion, according to data from Mergermarket. UK PE-backed P2P deal value, meanwhile, hit €23 billion last year, more than double the €9.7 billion the prior year.

P2Ps will not become commonplace in the short term until both target company management teams and PE bidders have greater confidence in the revenue outlook for 2020 and 2021, Investec noted.

Three factors make P2Ps “very difficult to work in the short term”, Christian Hess, who leads the private equity client group at Investec, told Private Equity International.

First, Hess noted that the covid-19 market dislocation has made it challenging for buyers and sellers to have conviction around a company’s 2020 and 2021 outlook.

“It remains a matter of fact that we can only collect new trading data once economies re-open, ideally for a number of months rather than weeks,” he said. “You need to wait until such time that you have the data set that allows you to build greater conviction to price the asset and bid more intelligently.”

Second – and from a seller’s perspective – it will be hard for a target company board to positively recommend an offer price to public shareholders given the same uncertainty of outlook they and their management team are faced with, Hess said.

Public assets have historically commanded higher average valuations than private ones – averaging up to 30 percent – for a number of reasons, including that investors are willing to pay a premium for more liquidity and transparency, according to a report from Bain & Co.

Size is the third consideration. For bigger P2Ps, PE bidders need financing, and the depth of the primary financing market for new credit is yet to be tested, Hess added.

“We’ve seen some signs of re-opening from repeat issuers both in loan and high-yield format, but are only starting to see launches of new issuer names. And of course, for a P2P, you have an obligation to procure certain funds, which usually means that committed debt facilities are in place and the bidder has existing cash resources to finance the deal.”

Earlier this month, KKR, Cinven and Providence Equity Partners made a €2.96 billion offer to fully acquire Spanish telecommunications company MasMovil. The deal is the largest take-private since the coronavirus spread globally in March, according to data from S&P Global Market Intelligence.

Hess noted that only few, if any, P2Ps will be feasible in the short term.

P2Ps have over the years grown to account for up to one quarter of annual PE deal value, Hess said, adding that he sees no reason this trend cannot continue once the economic outlook becomes clearer and primary debt markets have stabilised.

It will be a continuous trend for the PE industry as long as the supply-demand imbalance of high-quality deals and PE dry powder remains, he said. Private equity funds are still sitting on record amounts of dry powder and covid-19 has reduced the pool of top-tier assets that remain attractive to private equity buyers, Hess said, adding that many businesses that looked promising six months ago now face huge structural challenges.

Investec gathered 387 responses from GPs across the globe for the study.