Private equity ‘green shoots’ for second half as clock ticks on deployment

The pressure to deploy funds and return cash to investors is likely to lead to a boom in dealmaking in the second half of the year – even if financing conditions are still far from ideal, market sources told PE Hub Europe.

Uncertainty over the direction of interest rates and differences on valuations have been among the factors impacting dealmaking this year.

But there are “green shoots – the hope is for the second half to be more robust than the first half has been”, said Sunaina Sinha Haldea, global head of the private capital advisory group at investment bank Raymond James.

That optimism means some deals that were paused or died are being restarted, according to her colleague Allan Bertie, head of European Investment Banking.

“Buyers are feeling more confident on markets and hoping sellers see some flexibility,” he said. “After the summer, it could well be hectic. There will be deals planned for then, deals that were paused or died that have been restarted, and deals that have been brought forward all coming to market.”

Little choice

While wider market conditions are not perfect, the industry’s structure means firms will have to get moving, Sinha Haldea added.

“Private equity works on a clock and this is what people seem to miss. The clock continues to tick. While PE can go on hold for six months, it cannot do so forever. After the quiet period in 2020, we saw a huge run-up.

“GPs need to show deployment because otherwise it’s a drag on IRRs. It’s the same for exits. Hold for three to four years, maybe five, then sell or do a continuation fund. DPI is key in any market, but especially in this market, to raise the next fund.

“The gap to fundraise is quite big and can only be filled if the GP can show phenomenal numbers. That’s all looping together to create very good KPIs for the second half of 2023 for the market.”

Exit numbers have so far this year been held back by an IPO market that has been all but shut. Even firms that have conducted IPOs said the market is not open to all.

Roberto Quagliuolo, head of private equity Italy and co-head of Italy at Tikehau Capital, told PE Hub Europe after his firm’s IPO of electric motor component producer EuroGroup Laminations in early February: “Either you are riding one of these well-identified macro trends or the market is closed. Investors don’t feel the need to take risks for stories that are not perceived as a clear pureplay.”

That view extends to exits generally, as the right companies can find good returns, said Bertie.

“We’ve done some exits recently where pricing was at or above levels seen over last 24 months. The best businesses are attracting best prices.”

Some recent exit announcements include Cathay Capital selling its share in luxury brand marketer The Independents Group, Blackstone planning to sell MB Aerospace to Barnes Group for an enterprise value of around $740 million and Wise Equity exiting race-car builder Tatuus.

Options

But the poor financing conditions are still having an impact, particularly for public-to-privates, where financing “remains a challenge”, said Bertie.

“The amount of time banks have to commit funds is long. We’re waiting for stability to come back. The firms getting deals done are often using their own debt funds or reckon the deal works on an equity-only basis, then they will finance later.”

There had looked to be a pick-up in public-to-private deals after a flurry of such moves were announced in April, although some of these have since fallen by the wayside, including Apollo Global Management’s flirtation with online retailer THG and its months-long pursuit of engineering firm John Wood Group.

Smaller deals might prove to be more popular until conditions stabilise, he added.

“People have bet big on platforms over the last two years. They’re now looking at add-ons to prove their platform theses.”