Private equity cashed up but short on deals as Smartgroup talks fail

On Monday, Smartgroup, led by Michael Carapiet, announced TPG Capital and Potentia Capital had walked away from the listed group after earlier lobbing a $1.4bn offer and being granted exclusive due diligence.

Private equity firms overwhelmed with cash from investors could be to blame for a growing number of buyout proposals failing to result in deals.

On Monday, Smartgroup announced TPG Capital and Potentia Capital had walked away from the listed group after earlier lobbing a $1.4bn offer and being granted exclusive due diligence.

The private equity firms initially offered $10.35 a share to gain due diligence, but after entering the data room they walked back the proposal to $9.25 a share.

While the offer was still at a 17.7 per cent premium to the closing share price on September 28, which was just before the pair emerged as bidders, it was not enough for the Smartgroup board, led by Michael Carapiet.

As a result, the negotiations collapsed at the weekend.

The situation follows a move by Swedish private equity firm EQT to walk away from its initial buyout proposal for Iress earlier this year and the Australian-based BGH Capital from Hansen Technologies.

Some experts are now wondering whether the situation is symptomatic of the broader market conditions.

With low interest rates, some buyout funds have more money than they can spend as their investors place them under pressure to find returns at the right price.

There can be a race against the clock to invest for funds that need to return money to investors if the money cannot be spent within a certain time frame.

One question being asked around the market is whether the buyout funds are doing the same homework on targets they would do before making a proposal if they were not under so much pressure.

Smartgroup has a reliable reputation for regularly disclosing financial information to the market.

Some think if conditions were different TPG and Potentia would have offered the price they were later prepared to pay – $9.25 a share, rather than $10.35 a share – before going public with their proposal.

In Sweden, EQT is cashed up and its share price is soaring.

The private equity firm has been actively looking at several big buyout proposals globally, including $US4bn ($5.3bn) European pet food retailer Zooplus.

In Australia, it has been one of the groups bidding for the nation’s largest cancer care provider, Icon Group, and is looking at the $4bn Greencross, owned by TPG Capital.

TPG Capital is working on plans for a float in the US market and is no doubt eager to be looking its best as it gets paraded in front of equity investors from an investment and returns perspective.

Some of the challenges for private equity firms carrying out public market transactions is that proposals can be rejected in the final hour by their own investment committees, despite enthusiasm from local management teams.

Alternatively, local management teams can be under pressure to embark on transactions and therefore put forward proposals to a management committee higher than what the firm is prepared to pay.

Now the question is does another buyer exist for Smartgroup?

Sources say that listed peer SG Fleet cannot make the numbers stack up for a transaction, while the deal could be too big a bite for the current management team of the other listed player in the space, McMillan Shakespeare.

Attention now turns to the similar business Eclipx, which reports in two weeks.