In the first of a series of outlook Q&As for 2024, PE Hub Europe spoke to Mark Fariborz, partner and member of the management committee at private equity firm BC Partners.
The firm has raised 11 funds totalling more than €30 billion of committed capital, targeting control buyouts of European and North American businesses with enterprise values of over €300 million. It has offices in London, Paris, Hamburg and New York.
The firm’s deals this year include the sale of the towers business of telecoms company United Group for €1.22 billion, a multiple of 20.1x.
Do you expect a pickup in dealmaking in 2024 compared to next year?
This year has seen a very dislocated market, with buyers looking to deploy capital at effective prices and sellers waiting for better conditions to achieve their expected valuations, leading to many deals being pulled and/or stalling when this bid gap proves too wide. The software sector, in which I focus at BC Partners, is no stranger to this, with deal volumes down around 50 percent year-on-year across the market.
For 2024, I don’t foresee a sudden revival of the M&A market but do expect a notable pickup in dealmaking by the second half of the year. The macro environment, barring any significant shocks, is looking more settled than since early 2022, and interest rates remaining within a tight band – and maybe even declining – will bring some stability to the environment for pricing assets.
Time will allow for certain businesses to grow into their valuations, and at the same time the pressure to deploy will grow, especially given how much dry powder has been raised. Some of the larger GPs are under acute pressure to deploy their mega-funds that have been raised over the last two years but have been largely inactive.
As we combine a more favourable set of macro factors with pressure on GPs to return capital to LPs – not to mention portfolio companies facing debt maturity walls – and you could see a scenario where the dam breaks and there’s a lot more activity. The key question is what the new market clearing price will be.
How was your dealmaking experience in 2023?
On my end, one of the significant deals we carried out this year was the dividend recapitalisation of NAVEX, a governance, risk and compliance software business we acquired in 2018. This monetisation allowed us to provide returns to LPs from a very successful business within our portfolio while positioning NAVEX and its capital structure well for the coming years.
More broadly, a key characteristic of 2023 has been the increase in smaller, ‘self-help’ deals, with GPs carrying out targeted deals within their portfolio to recapitalise and sell partial stakes. These have taken the form of straight debt recapitalisations; minority stake sales, which don’t trigger a refinancing need; the use of continuation vehicles, and others. GPs remain under pressure to return capital to LPs and are finding creative ways to generate partial liquidity while extending their holds to fully exit under a more favourable market backdrop.
Generally, we’ve used this market slowdown to compound equity value behind high-quality portfolio companies. Where possible, we’ve also tried to do more add-on acquisitions for our portfolio companies, where we are effectively positioned as strategic buyers.
Which sectors do you expect to do well in 2024?
Our approach to investing is focused on buying what we call “BC companies”. What we mean by this is that we’re very focused on business fundamentals – namely companies with durable growth, attractive unit economics, and companies that sell mission-critical workflow software that drives real value for the end customer.
We’re big believers in consolidation and platform businesses versus point solutions so will also take interest in companies where we see a meaningful M&A opportunity. Of course, add-on M&A can be financially accretive, but for BC Partners it’s much more about driving incremental value for the end customer and making yourself a more strategic and therefore sticky vendor.
Given the B2B software recession of the past 18 months or so, we’ve also been able to see which businesses have truly demonstrated secular growth and have been able to achieve consistent growth against challenging macro conditions. For 2024 and beyond, these are the types of high-quality, proven companies we’re looking to invest behind.
Do you expect an increase in take-privates next year?
I actually don’t expect a material pick-up in take-privates. Many of the obvious candidates were picked over in 2022 and to a lesser extent this past year. Equity markets, while volatile, have also rallied from their lows and so many public targets are no longer trading as attractively as they were a year ago. My expectation for next year is much more of a pick-up in sponsor-to-sponsor deals.
I suspect the majority of the activity will come from sponsors taking private some of their recent IPOs that have failed to perform and are now trading significantly below their issue price.
What’s your outlook for exits in 2024?
I do expect a pickup in IPO activity in the coming year, but this comes from the very low levels we’re currently seeing.
However, in terms of unlocking the current ‘logjam’ of deals in the tech sector, my own view is that financial and strategic sales will be key to driving activity in the market much more so than IPOs. Recent IPOs brought to market have not performed well and so I’m not sure how constructive sentiment will be, notwithstanding the recent tick-up in IPO filings.
I also think that sponsors are increasingly weary of how long it takes to fully exit via the public markets and the volatility experienced along the way. The spate of unsuccessful IPOs from the 2020 and 2021 timeframe really brought home this lesson.
Given this, I’m much more bullish that sponsor-to-sponsor activity will pick up in 2024. I also think that you’ll see an uptick in strategic deals heading into next year. There have been some quite large deals this past year like Cisco/Splunk and Nasdaq/Adenza but I think you’ll see the return of more of the regular $1 billion to $3 billion deals next year.
Overall, the rallying cry from all LPs to GPs with regard to next year is that they want to see more exits and they want liquidity. The challenge for GPs is to generate this liquidity without selling at a poor moment. Private equity has historically generated returns by being patient and timing exits when multiples and market sentiment are most constructive. While we may not be at the optimal point next year, we’ll hopefully be closer to it than we have been in 2023.
Editor’s note: PE Hub Europe will be running 2024 outlook Q&As with senior private equity dealmakers through December.