Searchlight’s Oliver Haarmann says ‘wall of debt’ refinancing to drive dealmaking

Public-to-privates will also be busy in 2024 thanks to moderate growth companies trading at discounts, says Haarmann.

Oliver Haarmann, Searchlight Capital Partners
Oliver Haarmann, Searchlight Capital Partners

The “wall of debt” due to mature in 2024 will be the biggest driver of dealmaking this year, Searchlight Capital Partners founding partner Oliver Haarmann told PE Hub Europe in the next instalment of our outlook series with senior private equity investors.

The refinancing of the 2017-19 bull market ‘wall’ comes at a time of much higher interest rates, meaning companies will look to raise capital “through asset, subsidiary or even outright sales or through mergers with synergistic competitors to benefit from the combined companies’ higher EBITDA – creating a wave of opportunity for transactions”, said Haarmann.

Haarmann also expects plenty of take-private activity in 2024, an area where the private equity firm was busy during 2023, including two deals for UK-based companies: a £441 million ($557 million; €510 million) acquisition of alternative asset manager Gresham House and £524 million takeover alongside Providence Equity Partners of conference company Hyve Group.

“So long as very large-cap, tech companies continue to drive stock market indices, while more medium-sized, healthy, yet moderate growth companies continue to trade at significant discounts and receive less attention from analysts, take-private activity will be of interest,” he said.

Searchlight has offices in New York, London, Toronto and Miami. It has $11.6 billion of assets under management, according to its website.

How was your dealmaking experience in 2023?

Despite a challenging investment environment, we were able to remain productive in 2023 thanks to our flexible approach and experience executing more complex types of deals. We’ve never positioned ourselves as a straight buyout shop and the fact that over the past twelve months we’ve completed two take-privates with a third underway, one large corporate carve-out and two capital solutions investments across the UK, Europe and the US demonstrates the opportunities that we’re seeing for our strategy.

Do you expect a pickup in dealmaking in 2024?

I am optimistic that dealmaking will pick up this year. While market conditions may continue to be challenging, I anticipate that improved optimism about the macro-economic outlook will give firms more confidence to invest versus the last year, where high levels of uncertainty held them back.

In my view, the greatest source of deal activity is going to come when the ‘wall of debt’ maturities comes due. During the bull market of 2017-19 many acquisitions at peak valuation levels were financed at very high leverage multiples in an era of low interest rates. From 2024 onwards, we will see a lot of debt tranches start to come due, which will force companies to refinance in a much higher interest rate environment. These companies will therefore look to raise capital and will do so through asset, subsidiary or even outright sales or through mergers with synergistic competitors to benefit from the combined companies’ higher EBITDA – creating a wave of opportunity for transactions.

As a result, I think our opportunistic credit platform will be particularly active this year, through which we are able to provide flexible capital to help good quality companies facing short-term liquidity challenges. Looking further ahead, there is then an opportunity to convert the debt into equity and support the longer-term growth of these businesses.

Which sectors and/or sub-sectors do you expect to do well in 2024?

As mentioned, I think we’ll see heightened transaction activity for companies – across sectors and geographies – that were bought and financed with high levels of cheap debt in the bull market. But, beyond that, we have to think about which areas will suffer in the event of a recession. Discretionary consumer goods and services are likely to top the list of sectors that will be most impacted. Our strategy is to generally invest in companies with recurring revenues and more predictable cashflows in more defensive sectors.

Do you expect an increase in take-privates this year?

Yes, for the very same reasons we saw lots of activity last year. So long as very large-cap, tech companies continue to drive stock market indices, while more medium-sized, healthy, yet moderate growth companies continue to trade at significant discounts and receive less attention from analysts, take-private activity will be of interest.

This is true of PE funds, of course, but also management teams, for whom PE ownership is appealing because of the longer-term timeframe of decision making and performance measurement, the greater alignment with and attention from shareholders who will typically have far better understanding of their industries, and access to capital to support future growth.

What’s your outlook for exits in 2024?

I think that we’re likely to see more strategic acquisitions in 2024, whereby strategic buyers will take advantage of improved valuations to purchase quality companies, many of which owned by PE firms looking for exits to provide liquidity for their LPs.

Editor’s note: PE Hub Europe is running 2024 outlook Q&As with senior private equity dealmakers through December and January. The previous instalment was with Severin Matten, director and member of 3i’s global healthcare team.