Will Private Equity Firms become more active in the M&A market?
by Caroline Clayfield
An increase in mergers and acquisitions activity among private equity buyers was cited as a reason for predictions that M&A deals will increase by 22 per cent next year.
The latest ambitious prediction came from a survey of global business executives carried out by Thomson Reuters and Freeman Consulting Services. The ‘Outlook for Investment Banking Services’ report discovered a bullish sentiment running through the international business community over the future of M&A and claimed that deals from private equity buyers will be partly responsible for driving this growth.
There is no doubt that private equity firms have upped their involvement in M&A in recent months, with PE-backed deals in Asia surging 41 per cent year-on-year during the first nine months of 2011. China has seen 96 deals take place, worth a total of $4.8 billion, while India is leading the way with 105 deals worth $4.9 billion. A notable example is the Baring Private Equity-backed majority purchase of Chinese confectionery group, Hsu Fu Chi, by Nestle for $1.7 billion.
The Thomson Reuters survey also found that senior business executives named developed Asia as a top location for general M&A activity, suggesting the private equity companies are following a similar geographic strategy as trade buyers.
Asia is not the only region to experience a surge in private equity deals, however, as Latin America was named a front-runner by analysts from both Bain Capital and KPMG in a recent Financial Times interview. Argentina, Peru and Colombia were all mentioned as possible areas for growth.
Meanwhile, some regions in Europe are still attractive, despite the economic turmoil. Several recent deals including the $55 million takeover of UK-based datacenter provider Onyx Group by ISIS Equity Partners and the purchase of the UK arm of Krispy Kreme by Alkuin Capital shows there is still scope for PE deals in Britain. The appetite in the UK for renewable energy deals by private equity groups also shows little sign of abating with around $1 billion of transactions completed already this year.
Shawn Bone, of BTG Corporate Finance - which has just commissioned a survey of 50 UK private equity firms - summarised: “Investment activity is expected to increase in sectors such as manufacturing, energy and environment, and business services, all of which are generally predicted to improve ahead of the rest of the economy, and where attractive investment opportunities should become available in the next year.”
Many analysts point to Germany and the Nordic regions of Europe as being ‘healthy markets.’ One of the world's largest private equity deals this quarter was the $10 billion purchase of Danish-based security company ISS by rival G4S. ISS is owned by EQT, a Swedish private equity firm, together with GS Capital Partners, owned by Goldman Sachs. The result of this monster deal will be the world’s largest integrated security firm, with over one million employees.
Energy is clearly a favourite industry for investment by private equity dealmakers and healthcare is also likely to attract activity in 2012. These sectors, along with media and telecoms, are perhaps the best options for private equity firms looking to take advantage of the appetite for cross-border growth among businesses at the moment.
It is this desire for international growth – particularly into emerging markets – that is proving irresistible to PE investors who know they can buy up firms and sell them on quickly, making huge gains in the process. Blackstone Group, for example, recently sold its majority stake in Intelenet Global Services, an Indian telecoms firm, to a UK-based outsourcing firm called Serco for $591 million.
The re-emergence of private equity in M&A dealmaking is also being welcomed by mid-market businesses. They are eager for growth and will see investment from a private equity bidder as a great way of generating capital to help them take advantage of any upswing in the economy. This is especially attractive in the current climate where credit is scarce for many medium-sized businesses. The PE investors in the meantime will enjoy the prospect of their purchases expanding quickly to facilitate a quick resale at a high value.
Thomson Reuters’ Head of Global Deals, Leon Saunders Calvert, did, however, urge some caution on the outlook for 2012. He explained how high risk deal activity was “confidence driven,” and wealthy PE investors will be hoping that their confidence has not been misplaced. They will also be hopeful that their confidence is representative of the wider attitudes of trade buyers to whom they will want to offload their purchases some months or years down the line.