Searchlight preps auto diagnostics biz sale

Cinven-backed Viridium pulls out of deal; EY’s Guerzoni bullish.

We’re starting with a scoop by Michael Schoeck, who reports that Searchlight Capital Partners is set to launch a sale process for an automotive diagnostics company in its portfolio within the next week.

Next, we look at the collapse of Cinven-backed life insurance consolidator Viridium’s planned acquisition of a portfolio from insurer Zurich and what it means for regulatory scrutiny of private equity ownership in the sector.

We then look at a survey of private equity professionals from EY that has a bullish outlook for dealmaking in 2024, and I get the thoughts of Andrea Guerzoni, EY’s global vice chair of strategy and transactions.

Rounding things out, I speak to Parabellum Investments’ Rami Cassis to hear what’s next for banking software company ieDigital after its acquisition of AI-based recommendation system Abaka.

Sale process

Searchlight Capital Partners is readying its Swedish automotive diagnostics company Opus Group for sale and expects to launch a sale process within the next week, sources familiar with the matter told Michael Schoeck.

Opus Group operates automotive diagnostics and emissions control centres in North America and Europe.

Searchlight recently engaged a cross-border investment bank to target prospective buyers, including US and European private equity sponsors, the sources said. Opus Group, which was publicly traded before a 2018 take-private acquisition by Searchlight, is being marketed off of $50 million in EBITDA generated over the past year.

Because a portion of the company’s holdings are technology-enabled, one source said that the sponsor could be seeking a slightly higher exit multiple than the 10x-11x EBITDA valuation automotive services companies have been hitting in recent sales.

Searchlight Capital and Opus Group declined to comment for the report.

Check out the full article on PE Hub Europe for more on Opus’ business model, its growth and the wider automotive services market.

Deal dropped

Increased regulatory scrutiny of private equity was always a given as the industry grew, but we’re seeing more and more signs of its impact on dealmaking.

German life insurance consolidator Viridium yesterday said it was pulling out of an acquisition of around 720,000 policies with roughly €21 billion in assets under management from insurer Zurich that it had announced in 2022, citing “considerations relating to Viridium’s current ownership structure”.

That ownership structure includes private equity firm Cinven, which created Viridium 10 years ago alongside reinsurer Hannover Re via the €300 million acquisition of Heidelberger Lebensversicherung from Lloyds Banking Group. Gross assets at the time were £7.2 billion, or €8.4 billion at current exchange rates, but Viridium has grown heavily since, including by making four acquisitions. The group has around €65 billion of AUM today, according to its website.

But regulators have since been taking a closer look at closed-end private equity funds investing in life insurance businesses.

Last year for instance, EU regulators investigated the collapse of Italian insurer Eurovita, also owned by Cinven, to find whether private equity-owned companies were subject to extra risks, Reuters reported at the time.

It is too early to say whether the Zurich decision is the start of a pullback by private equity from the insurance industry, said one M&A banker who focuses on the sector. But he added that such decisions are “never good for the PE industry”.

Cinven declined to comment when approached by PE Hub Europe.

Megadeals

Switching to more bullish news for dealmaking, 71 percent of private equity leaders expect a rise in M&A megadeals above $10 billion and eight in 10 CEOs expect the same, according to a new survey from EY.

Seventy percent of the private equity respondents expect a rise in corporate divestment or carveout activity this year. It was the first time that EY’s CEO survey, which gauges the views of 1,200 global CEOs across 21 countries, included private equity voices. They came from 21 countries and across a range of sizes of AUM.

Some 36 percent of CEOs are “actively pursuing” M&A deals in the next 12 months, with a further 29 percent looking to divest. The US was the most attractive target region cited, followed by Japan, the UK, China and India. Manufacturing topped the sector list, followed by banking and capital markets, insurance, consumer products and mobility.

I caught up with Andrea Guerzoni, EY’s global vice chair of strategy and transactions, for more. Guerzoni said he was “cautiously optimistic” about the outlook for dealmaking in 2024.

“There is momentum and a much better pipeline coming from a stronger Q4,” he said. “There’s a lot of dry power and sooner or later, mathematically and contractually, it needs to be deployed. It was reasonable to hold on 12 months ago because of the extreme uncertainty but that is much less justifiable today.”

While the valuation gap that stymied a lot of dealmaking last year is still present, falling interest rates and inflation are closing the gap, as have improving macroeconomics, he said.

“As a financial system we are not expecting further bad news. The very complex geopolitical scenarios are going to impact the shape of economic growth regionally and globally to different extents. But all these expectations are factored into the valuations already.”

Looking at the $10 billion-plus megadeals, he foresaw a “complete turnaround” from a quiet 2023.

“The geopolitical, macroeconomic and regulatory complications were all flashing red last year so there were a lot of good reasons for not entering into a large deal,” he said. “The underlying reasons are still present but the way in which financial sponsors and their investors are assessing the next five to 10 years has changed. There’s acceptance that this is going to remain a complex scenario, but that they need to invest. The need to provide superior returns in a world that is going to progressively reduce the level of interest rates is becoming stronger and stronger.”

There should also be a progressive improvement in the IPO market thanks to the stabilisation of the financial market, he said. Corporate buyers as an exit route will also be more active, “provided that the gap between financial sponsor expectations and corporate assessment of the potential synergies that could justify deals can be narrowed.

“Some of the assets in the portfolios of the large private equity firms were acquired in the vintages when multiples were much higher. That represents a bit of a hurdle.  Many will be more prone to continue to hold them and wait another year to make sure they don’t record losses.”

Add-on hunt

Parabellum Investments portfolio company ieDigital is on the lookout for acquisitions that will add small business lending software, fraud analytics software and customer engagement and call management software to its product set that now includes AI-based recommendation system Abaka, Parabellum CEO Rami Cassis told PE Hub Europe.

Further acquisitions will most likely be in the UK and the US. Parabellum was already looking to add more US companies to expand its presence in the US, on top of the acquisition of Connect FSS, a banking app and website developer for credit unions, based in Sandy, Utah.

“We are looking to diversify to grow our market share within the credit union market in the US,” said Cassis. “We will also be looking at the banking sector. We want to continue to grow both organically and by acquisition.”

Check out the full interview for more on the Abaka acquisition and ieDigital’s growth plans.