Private Equity Outlook: Carveouts on the Rise as Fundraising Slows
As dealmakers look to innovate their origination process, we anticipate a continued rise in take-privates and corporate divestitures.
Amid a prolonged period of elevated pricing, PE dealmakers are exploring innovative ways to source deals and partner with other investors. One of the more interesting announced deals that highlights this new dynamic is Blackstone’s announced $17 billion buyout of Thomson Reuters’ financial and risk business. Public-to-private deals have increased for four consecutive years, and we think that corporate carveouts and divestitures will be the next trend in deal sourcing.
Transactions of this nature are happening across the PE ecosystem, and the size of many recent deals is noteworthy; five of the 13 deals $1 billion or more announced through March 20 were divestitures or carveouts. Notable examples include Kroger shedding its convenience store business and Toshiba’s sale of Westinghouse Electric Company, its nuclear power unit.
Major Investments by PE Firms Carveouts/Divestitures in 1Q 2018
An uptick in carveouts and divestitures is to be expected following several years of record-level deal-making by strategic acquirers, many of which are now looking to slimdown from the buying binge. According to a recent EY report, 87% of companies plan to initiate their next divestment within the next two years, compared to just 43% in 2017. Since these situations often require significant post-acquisition effort, we think they are prime targets for PE firms to find discounts and showcase operational expertise.
Another trend highlighted by the aforementioned Thomson Reuters deal is that nontraditional PE investors, including large pension plans and sovereign wealth funds, are becoming prominent players as they compete for deals both alongside and against PE firms. Through this “club deal,” Blackstone is partnering with two of the most prolific nontraditional PE investors: the Canada Pension Plan Investment Board and GIC, Singapore’s Sovereign Wealth Fund. We expect sophisticated LPs, many of which are building in-house teams to execute direct deals, to increasingly partner with reputable PE firms on deals like this in the coming quarters.
In February, a group of investors committed $700 million to a new venture called Capital Constellation, which will provide anchor investments to new managers while seeking to gain expertise and benefitting from a revenue-sharing model. Other investors are being even more targeted: Caisse de depot et placement du Quebec, which already has three PE offices around the globe, announced in March it was creating its own in-house investing team.
Even though some LPs are venturing out on their own, demand for traditional PE funds has remained strong in recent years; however, it appears that the frenzy may be waning somewhat early in 2018. Through mid-March, US PE funds had closed on $35 billion across 48 funds, both of which are less than 20% of the full-year totals from 2017. Most notable is the downturn in activity for funds in excess of $1 billion, with only nine such vehicles closed so far in 2018. We largely attribute this slowdown to mean reversion; North American PE firms raised 29 funds of $5bn+ funds over the five years from 2010-2015, but closed 24 funds of that size in just two years from 2016-2017.
Fundraising for Funds of $1bn+
Looking ahead to the rest of 2018, we expect to see an uptick in fundraising as LPs continue to indicate a strong appetite for PE. While we think it is likely that billion-plus fundraises will fall short of the totals from recent years, activity should accelerate as several prominent managers have held initial closes on sizable vehicles that should close in the coming months.
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