Back to Basics for Private Equity

by Thomas Rasmussen

Coming off a dealmaking binge fueled by cheap credit, private equity (PE) shops have been investing much more soberly since the debt market collapsed late last summer. Highly leveraged multibillion-dollar buyouts have gone the way of collateralized derivatives. As financing has become much more expensive, PE shops have in turn become more price sensitive. Deals are much smaller and generally done with equity these days. The heyday of the PE buyout boom saw dollars spent on deals balloon from $56bn in 2005 to $98bn in 2006 before peaking at $118bn in 2007. Last year saw a drastic ‘normalization,’ with disclosed spending by PE firms falling three-quarters to just $26bn. Spending on buyouts has plummeted this year, with just $3bn worth of deals through the first five months of 2009.

Even as the aggregate value of LBOs has declined sharply, we would note that the volume remains steady. (The 90 PE deals announced so far this year is roughly in line with the totals for the same period in three of the past four years.) We might suggest that this indicates a return to basics for PE firms. Instead of bidding against each other in multibillion-dollar takeouts of smoothly running public companies, buyout firms are returning to more traditional targets: unloved, overlooked public companies as well as underperforming divisions of companies.

In terms of recent take-privates, we would point to Thoma Bravo’s pending $114m acquisition of Entrust, which valued the company at less than 1x sales. And looking at divestitures, we would highlight the recent buyout and subsequent sale of Autodesk’s (ADSK) struggling location-services business. Hale Capital Partners acquired the assets in February for a very small down payment and what we understand was a $10m backstop in case things went awry. New York City-based Hale Capital put the acquired property through a pretty serious restructuring. (The moves got the division running at what we understand was an EBITDA run-rate of $5m on approximately $20m in trailing sales.) Hale then sold the assets for $25m in cash and stock in mid-May to Telecommunications Systems following a competitive bidding process. Through the terms of the divestiture, Autodesk also had a small windfall in the sale of its former unit, pocketing an estimated $5m.

PE Spending Falls of a Cliff

Year Average deal size (total known values/total deals) 2005 $218m 2006 $305m 2007 $395m 2008 $106m 2009 $26m

Source: The 451 M&A KnowledgeBase

Comments

[Old Trader:]

Aside from capital raising by some of the financials, the IPO market is, moribund, so that pretty much kills one exit strategy for PE and VC firms, leaving only strategic acquisitions as the only way to exit, at this point, and possibly for some time into the future. It does seem like there's a lot of focus on distressed debt funds, though..(no shortage of that around...). At least we won't be seeing those "flip" deals...(in and out in a year...sometimes less...usually after a huge dividend being paid, financed by a huge amount of debt).

Jun 09 08:42 AM

[PJ Louis:]

I am in total agreement with Old Trader. There is not much to add. Strategic acquisition exit strategies require a long view of the industry sector and there is nothing wrong with that.

Jun 09 09:08 AM