Private Equity plunge set for a turnaround says Bain & Co

Private equity sales hit rock bottom but signs of recovery are emerging with Ticketek-owner TEG and Vitex set for strong demand.

Swift increases in the cost of money has contributed to shutting down the IPO market.

Private equity company sales almost ground to a halt in the first half of 2023, but there are signs of recovery as expectations grow that central banks are approaching the end of their interest rate hiking cycle.

With swift increases in the cost of money to control the highest inflation in decades shutting down the IPO market, the value of investment exits fell to the lowest in over a decade, a fresh report by Bain & Company shows.

“It’s been a tough start of the year, and a continuation of the tough finish for the end of last year, and that’s because of uncertainty,” said James Viles, head of Bain’s Australian Private Equity practice.

Macroeconomic uncertainty, uncertainty about the cost of money, and uncertainty in the availability of labour had made it hard for buyers to be convinced to pay high prices for assets.

“On the sell side, things have not been so bad so that people feel they need to change their expectations of pricing.” Mr Viles said, adding disagreements over price and not access to credit had been the main driver.

“We didn’t have the banking challenge or a credit availability challenge that we saw in the northern hemisphere, but that bid-ask spread was a real challenge at the end of last year and the beginning of this year.”

New PE investments, exits and fundraising all nosedived, with deal values plunging to U$2.5bn in the first half of 2023, compared to the U$14bn worth of deals done over the same period a year earlier.

Not a single non-infrastructure deal was achieved for over U$1bn. Los Angeles-based buyout fund Platinum Equity’s purchase of building products group JELD-WEN’s Australasia business for $688m was the largest transaction, in a process run by Macquarie Capital.

Outside of that, Brookfield Asset Management and MidOcean Energy’s $18.7bn takeover of Origin Energy was the largest infrastructure deal, followed by Queensland Investment Corporation (QIC) purchase of a stake in New Zealand-listed company Victor metering business, Vector Metering.

The lack of activity meant investment banking fees in Australia halved over the period.

While the outlook will remain volatile in the rest of the year, with slowing economic growth and the threat of recession in some countries, there are signs that the deal drought could soon turn around.

The fact that some recent transactions had achieved record price multiples showed “good businesses are finding their way out and people are paying up for them,” Mr Viles said.

“Now is the right time and there is a pipeline of transactions that we see live with businesses that are not cyclical targeted for 2024 exits and there will be good demand for those.”

Private equity firm Silver Lake and co-owners of TEG are running a sale process for the business, which includes Australia and New Zealand’s leading ticketing services provider, Ticketek, Dataroom reported this month.

That and an ongoing sale process for vitamin manufacturer Vitex were good examples of businesses targeted for 2024 exits which would likely see strong demand.

“There are a lot of people on the buy side willing to spend money who don’t want to sit out and want to buy good businesses, so I think we will see the right timing for those businesses come into play.”

In the US, a sharp fall in consumer and producer price data has fuelled hopes the Federal Reserve is on its way to win its battle against inflation, while in Australia the RBA is also expected to be near the end of its hiking cycle.

“The thing that private equity doesn’t like is uncertainty,” Mr Viles said.

“So far as there is growing conviction … on a peak or downward trajectory I think that is a helpful thing for the industry, undoubtedly.”

Private equity firms are not interested in consumer-focused cyclical business yet, but were still very keen to invest in companies exposed to defensive sectors.