Record sums of private equity cash chasing scarce assets have led to the emergence of “express auctions” that decide hotly contested bidding battles in a matter of hours.
Final rounds of bids in recent sales including Parkdean, the caravan park operator, Oasis dental care and SLV Lighting, finished in less than 72 hours, say people involved in the deals — a breakneck pace for businesses worth hundreds of millions of pounds.
Faster auctions are being driven by easy financing and new rivals entering the space, including sovereign wealth funds and rich individuals, taking valuations to near those being achieved before the 2008 financial crisis.
Such dealmaking reflects the record amounts of money pouring into private equity funds as investors seek better returns than in other asset classes. An increase in fundraising activity has led to record levels of cash waiting to be invested in Europe at $188bn, according to Preqin, the industry data provider. In the US, the figure is $498bn and in Asia $120bn.
Prequin found that investors paid a multiple of 10 times earnings for purchases in the past two years on average. This is only slightly less the 11 times multiple that private equity-backed buyouts were paying in the boom of 2006 and 2007.
Demand among private equity groups is also driven by the amount of uninvested cash — often known in the industry as dry powder — that has soared as managers have not been able to find the right assets to buy but are under pressure to invest money raised. Private equity coffers have been boosted by the availability of low-cost debt.
Professor Florin Vasvari, who teaches private equity at the London Business School, said private equity investors are under pressure to deploy money raised in 2011 and 2012. And, in the meantime, more money has been raised. “They haven’t invested the capital and now they find themselves in the last year of investment,” he said.
Tom Whelan, head of private equity at Hogan Lovells, said: “In the current market we are in a position where there’s lots of funds with record amounts of dry powder and investors looking to deploy that dry powder.
“At the same time you’ve also got pension funds — who have traditionally invested in private equity funds — looking to also make a mark.”
The media group steered the process from the bid submission to a purchase contract in just 72 hours. The same process would be typically expected by private equity executives to have extended for several weeks.
“Auctions are very competitive at the moment and they are being driven by a number of factors — scarcity of top-quality assets combined with a lot of big houses having raised big funds which they need to deploy, and good debt markets,” said Adrian Maguire, who leads the private equity team at law firm Freshfields Bruckhaus Deringer.
“There is too much money chasing too few assets,” said Mr Maguire.
As a result, sellers can also force buyers to accept their terms on auction processes, to the point of rushing due diligence used to vet purchases ahead of a transaction when it is not certain a potential buyer will scoop an asset.
Private equity groups are making increasing use of so-called hell or high water clauses, meaning that if anything goes wrong after the sale has been agreed — including potential regulatory hurdles — the buyer is expected to make the deal work regardless of extra costs.
Derek Shakespeare, co-head of UK M&A at Barclays in London, said investors in private equity are feeling the pressure to deploy record amounts of capital.
“Buyers are increasingly under pressure to carry out more of their due diligence on an asset in round one of the bidding process,” he said.
He added that sellers now expect serious bidders to be involved in the process before the asset is put for sale — in some cases many months before. This can also mean that the auction does not happen at all because bidders are willing to pay a high price for an asset before it reaches a more open process.
David Walker, global co-chair of private equity at Latham & Watkins, said: “The auction process is getting more intense now.
“Sellers like to take a handful of the strongest bidders and negotiate with them prior to the submission of final bids, precisely because there is a lot of demand on the buyside so they are able to do this, to ramp up the competitive tension.”
Mark Goldstein, a senior private equity-focused banker at RBC Capital Markets in New York, said the US has seen similarly aggressive bidding processes.
“Sellers are pressuring sponsors [private equity companies] to make decisions on accelerated timeframes, frequently with less time than they might otherwise want or need,” said Mr Goldstein.
However, while the better assets are finding ready buyers, some private equity executives describe a two-tier market where sales of lower-calibre businesses that fail to attract much interest.
One private equity partner said that these assets tend to go under the radar. He added that investors were also more cautious now than before the financial crash.
“The structures in place now are less risky that the ones a decade ago,” said the partner, who declined to be named. “Managers have more realistic expectations of the underlying growth of a business now.”
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