Forbes.com

Will public-to-private deals take off in 2013?

A major breakout in PE deal making hinges on a comeback of the public-to-private deals that dominated PE’s last cyclical peak and have been so notably absent since the global financial crisis.

By Graham Elton, Bill Halloran, Hugh MacArthur and Suvir Varma

Published on April 09, 2013
min read


This article originally appeared on Forbes.com. Prospects for private equity investment activity in 2013 look better than they have since the global financial crisis. But a major breakout in PE deal making hinges on a comeback of the public-to-private deals that dominated PE’s last cyclical peak and have been so notably absent since then. Between 2004 and 2007, public-to-private buyouts accounted for 90% of the increase in total buyout deal value. Since 2007, the end of “take private” deals contributed to 83% of the drop in deal value. Bain & Company’s Global Private Equity Report 2013 describes how recent industry and market changes are making public-to-private deals harder to pull off today. Because PE fund sizes are smaller than they were in the boom years, fewer funds have the wherewithal to absorb a mega deal on their own. PE dealmakers will need to join forces with other funds or seek partnerships with large LPs to do big deals. Rising public equity markets make it more difficult for PE funds to identify good companies they can buy at a low enough price to make the math work. What would it take to power a revival of public-to-private deal making? For a public-to-private deal to be attractive, would-be PE acquirers need to be satisfied that a transaction they may be contemplating meets three criteria before they proceed. First, is the target company a good business; that is, can it profitably increase revenues and generate returns that exceed the cost of capital? The due-diligence process needs to confirm that the target enjoys a strong market position, share trend, market growth and return on capital. It also needs to weigh the company’s business cycle risk and how much free cash flow it generates. Second, is the acquisition price attractive relative to the company’s growth prospects? There is not enough magic in leverage or growth to generate attractive returns if the price paid for the company is too high. Third, is sufficient leverage available at low interest rates to allow for a good return? Interest rates today are far more favorable than in 2006 and 2007, with the cost of debt currently around 6% versus nearly 8% in the boom years. And the desire for yield is leading creditors to arrange large debt packages able to support big deals. Debt multiples for large US buyouts of companies with pre-tax earnings above $50 million were 5.5 times EBITDA in the fourth quarter of 2012; and with the debt markets as strong as they are going into 2013, multiples could soon close in on 2007’s record high average of 6.2 times EBITDA. Based on current market realities, how many companies pass the sniff test as potential “take private” candidates today? To find out we screened all 780 publicly-traded US companies with a total enterprise value between $3 billion (a proxy for the threshold size a deal would need to reach to have a meaningful impact on the amount of capital put to work in the industry) and $50 billion (the largest practicable deal size). Just 46 companies—fewer than 6% of the initial candidates—satisfied the reasonable assumptions we applied to qualify as attractive targets. Although this analysis does not lead us to anticipate a large number of big public-to-private deals in 2013, it would not take many to move the needle on deal value. Even if the North American buyout market were to otherwise remain flat in 2013 compared with 2012, the proposed $24.4 billion Dell deal alone would push up total disclosed deal value in the region by 24%. With or without a return of take-private deals, the investment picture for 2013 is brighter than it was a year ago, setting the stage for a bigger result. Continuing to fuel PE investment activity, dry powder at the beginning of 2013 totaling nearly $900 billion globally ($335 billion of it for buyouts alone) is already in the hands of GPs eager to do deals. Bain estimates that assuming North American and Asian deal making continues to grow at its recent pace and Europe remains flat, uncalled capital commitments could be sufficient to finance buyout activity for the next 3.1 years. This ensures that competition for deals will continue to be intense in 2013. Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.

This article originally appeared on Forbes.com.

Prospects for private equity investment activity in 2013 look better than they have since the global financial crisis. But a major breakout in PE deal making hinges on a comeback of the public-to-private deals that dominated PE’s last cyclical peak and have been so notably absent since then. Between 2004 and 2007, public-to-private buyouts accounted for 90% of the increase in total buyout deal value. Since 2007, the end of “take private” deals contributed to 83% of the drop in deal value.

Bain & Company’s Global Private Equity Report 2013 describes how recent industry and market changes are making public-to-private deals harder to pull off today. Because PE fund sizes are smaller than they were in the boom years, fewer funds have the wherewithal to absorb a mega deal on their own. PE dealmakers will need to join forces with other funds or seek partnerships with large LPs to do big deals. Rising public equity markets make it more difficult for PE funds to identify good companies they can buy at a low enough price to make the math work.

What would it take to power a revival of public-to-private deal making? For a public-to-private deal to be attractive, would-be PE acquirers need to be satisfied that a transaction they may be contemplating meets three criteria before they proceed.

First, is the target company a good business; that is, can it profitably increase revenues and generate returns that exceed the cost of capital? The due-diligence process needs to confirm that the target enjoys a strong market position, share trend, market growth and return on capital. It also needs to weigh the company’s business cycle risk and how much free cash flow it generates.

Second, is the acquisition price attractive relative to the company’s growth prospects? There is not enough magic in leverage or growth to generate attractive returns if the price paid for the company is too high.

Third, is sufficient leverage available at low interest rates to allow for a good return? Interest rates today are far more favorable than in 2006 and 2007, with the cost of debt currently around 6% versus nearly 8% in the boom years. And the desire for yield is leading creditors to arrange large debt packages able to support big deals. Debt multiples for large US buyouts of companies with pre-tax earnings above $50 million were 5.5 times EBITDA in the fourth quarter of 2012; and with the debt markets as strong as they are going into 2013, multiples could soon close in on 2007’s record high average of 6.2 times EBITDA.

Based on current market realities, how many companies pass the sniff test as potential “take private” candidates today? To find out we screened all 780 publicly-traded US companies with a total enterprise value between $3 billion (a proxy for the threshold size a deal would need to reach to have a meaningful impact on the amount of capital put to work in the industry) and $50 billion (the largest practicable deal size). Just 46 companies—fewer than 6% of the initial candidates—satisfied the reasonable assumptions we applied to qualify as attractive targets.

Although this analysis does not lead us to anticipate a large number of big public-to-private deals in 2013, it would not take many to move the needle on deal value. Even if the North American buyout market were to otherwise remain flat in 2013 compared with 2012, the proposed $24.4 billion Dell deal alone would push up total disclosed deal value in the region by 24%.

With or without a return of take-private deals, the investment picture for 2013 is brighter than it was a year ago, setting the stage for a bigger result. Continuing to fuel PE investment activity, dry powder at the beginning of 2013 totaling nearly $900 billion globally ($335 billion of it for buyouts alone) is already in the hands of GPs eager to do deals. Bain estimates that assuming North American and Asian deal making continues to grow at its recent pace and Europe remains flat, uncalled capital commitments could be sufficient to finance buyout activity for the next 3.1 years. This ensures that competition for deals will continue to be intense in 2013.

Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.