The last time we saw leveraged buyouts (LBOs) occur with such frenzied speed and spending, it was during the years of 2006 and 2007, right before the financial crisis of 2008. As we recover from the COVID-19 pandemic, interest rates remain low, and many business owners forced into survival mode are seeking exit opportunities. Plus, private equity firms are more than ready to spend the record levels of cash on which they have been sitting for quite some time.
So far in 2021, private equity firms have already made $470 billion in acquisitions. These deals include:
- Blackstone Group Inc. taking data-center operator QTS Realty Trust Inc. private for $10 billion.
- Blackstone partnering with Carlyle Group Inc. and Hellman & Friedman on a $34 billion leveraged buyout of medical supplier Medline Industries, Inc.
- Francisco Partners and TPG Capital entering into an agreement with Dell Technologies to acquire Boomi, a cloud-based integration platform service. The deal is valued at $4 billion and is expected to close by the end of this year.
The value of private equity purchases for this year is on track to surpass all of 2020 in just a matter of weeks, already eyeing the 2007 record - only halfway through 2021.
Cheap Debt is Fueling PE LBOs
Low interest rates have helped to make up for surging takeover valuations and enable higher debt ratios. This is even as regulators warn about the risky practice of buying up too many targets that are carrying more debt than they can handle.
For transactions valued at least $1 billion, the median EBITDA multiple has soared to 14.5 this year, costing investors a price that’s up from single digits 10 years ago. At the same time, companies being acquired by private equity firms are shouldering an average of up to six times more debt than the EBITDA they are able to generate in a year.
Higher Prices Mean Bigger Equity Checks
While some buyers are willing to pay huge prices, many banks are becoming reluctant to finance leveraged buyouts at such inflated valuations. For this reason, private equity firms are being forced to write bigger equity checks. In 2020, the share of U.S. leveraged buyouts in which PE firms put down more than 50% of the deal price as equity was 41%—that’s up from 25% in 2019.
The Draw of Tech Companies
Tech companies commonly draw high valuations in both private and public markets, and many of these businesses have grown during the pandemic due to the boom in remote workforces. Private equity is targeting tech companies more than ever because of the high paydays that they tend to offer. In 2020, PE firms paid an average 13.2 times a company’s annual EBITDA for U.S. leveraged buyouts in 2020, an all-time high. And, over the past 10 years, technology-focused buyout funds generated internal rates of return 6.4 percentage points higher than non-technology funds.
The overall strategy behind these tech-driven buyouts has shifted. Rather than merely aiming to cut costs, more buyout funds are targeting growing businesses to increase sales, often keeping the same management team in place (such as the Medline LBO).
Another example of private equity pursuing growth is the action surrounding the dating app Bumble. In 2019, Blackstone purchased a majority stake that valued the app’s parent company, Magic Labs, at $3 billion. Just a little over a year later, Blackstone took Bumble public, and its market value is now $8.6 billion.
There is also other activity playing a role in the buyout boom. More and more buyout firms appear to be courting investors by giving them the chance to avoid fund fees by investing directly in target companies. The opportunity for these types of co-investments makes the unspent cash of PE firms even more appreciated.
The SPAC Frenzy
Special purpose acquisition companies are driving up the competition for assets while also offering a different exit option, contributing to the flurry of private equity activity this year. Selling to a SPAC is faster than going through an IPO, and in some cases, SPAC bidders can drive up the sale price of a company that private equity is interested in flipping.
Ready to Sell?
Don’t leave money on the table. Our M&A experts at Benchmark International look forward to hearing from you regarding how we can help you sell your company for the maximum value possible.
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Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com
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