Private equity today (2023)

Pablo Iacobelli 
Carey y Cía, Santiago
piacobelli@carey.cl

Report on session at the 20th Annual International Mergers & Acquisitions Conference in New York

6 June 2023
 

Moderators

Christian Cascante Gleiss Lutz, Frankfurt

Alex Kelly Latham & Watkins, New York

Speakers

Eliana Catalano BonelliErede, Milan

Audrey Chen JunHe, Beijing

Haigreve Khaitan Khaitan & Co, Mumbai

Maura McLaughlin Arthur Cox, Dublin

Kevin Schmidt Debevoise & Plimpton, New York

Commentator

Vincent Napolitano Kohlberg Kravis Roberts & Co, New York

The session began with Alex Kelly providing an overview of private equity markets. She noted that dealmaking and capital invested in PE markets had been increasing before the Covid-19 pandemic. However, there was a slowdown in the market in 2022; it is projected to return to 2018 levels in 2023. Kelly also highlighted, in terms of industry, the increasing concentration of technology deals. She mentioned that fundraising for private equity and asset managers has slowed, but there is an uptick in infrastructure funds and direct lending.

Christian Cascante discussed the current geopolitical situation and its economic effects. He mentioned a notable shift from syndicated loans to private credit, reflecting cautious lending approaches by banks. While middle-market leveraged buyouts (LBOs) continue to be pursued, larger LBOs face challenges in the current environment. Cascante also pointed out that deal characteristics have evolved with reduced leverage and larger equity checks. He mentioned that direct lending and continuation funds are becoming increasingly common in deal structures.

Audrey Chen further elaborated on the private equity markets, noting unfavourable market conditions in early 2023 due to macroeconomic issues. However, she highlighted positive aspects such as the growth of technology deals, specialised funds – particularly infrastructure-focused funds – and opportunities in the energy transition. Chen also commented on the electric vehicle market and automation.

Vincent Napolitano discussed the impact of macroeconomic headwinds and geopolitical factors on dealmaking. He emphasised that regulatory changes influenced by aggressive enforcement and competition laws have raised concerns in the private equity industry. Napolitano mentioned that flexibility in pricing and financing terms is necessary in the 2023 dealmaking environment. He also noted the need for a different approach, highlighting the potential in technology sectors.

Maura McLaughlin analysed several key trends in the dealmaking landscape. She mentioned the reduction in deal sizes and the dominance of public-to-private transactions, accounting for 80 per cent of deals. McLaughlin discussed pricing disparities between buyers and sellers, and how the public market isn't reflecting correct price adjustments, resulting in large premiums. Limited funding capacity has led to a shift towards more debt in deals, with private credit and sovereign wealth funds becoming increasingly important sources of funding. She also pointed out the rise of carve-outs, driven by factors such as activism and environment, social and governance (ESG) considerations. McLaughlin highlighted the significant deal activity in the technology sector, particularly software-related investment. Lastly, she commented on the increasing prominence of ESG considerations in dealmaking.

Kevin Schmidt discussed sponsor-to-sponsor deals and the governance issues surrounding the remaining stake and its transfer to a continuation fund. Kelly mentioned an increase in minority deals, and Eliana Catalano highlighted the active role of continuation funds for performing assets near the end of a fund's term. They both emphasised the importance of alignment of interest when the same management team acts as both the seller and the buyer.

Haigreve Khaitan provided insights from the Indian perspective, noting the growing popularity of general partner (GP)-led secondaries and continuation funds as alternative exit options. However, the tightly regulated funds regime in India presents challenges for GP-led secondaries, including concentration limits for local alternative investment funds. He mentioned that take-private transactions have also encountered regulatory restrictions. Bolt-ons and add-ons have remained popular, enabling companies to build on existing investments. Control deals are also gaining popularity as founders and promoters are willing to give away control.

Napolitano emphasised the shift from a high water market to a fair market, leading to valuation disconnects, particularly in larger billion-dollar deals. He mentioned the opportunities presented by take-private transactions, where there is less competition and the ability to execute deals quickly. Napolitano concluded his remarks by highlighting the liquidity benefits provided by take-private deals for private equity sponsors and exiting funds.

Catalano discussed deal terms and considerations. She explained different deal structures such as full equity backstop and reverse termination fees. Catalano elaborated on conditional closings, including material adverse effect (MAC) clauses and ‘hell or high water’ clauses. She also discussed on the drafting of representation and warranties (R&W), and on R&W insurance deepening given the impact of ESG on R&W.

Commenting on Catalano’s statements, Napolitano emphasised the significant evolution in the private equity space, particularly in terms of uncertainty and the increasing competitiveness among sponsors. He mentioned that, in the past, deals were more focused on performance but now deal certainty and risk allocation have become crucial factors. He also stated that the regulatory landscape has played a significant role in shaping decisions.

Schmidt highlighted the escalating enforcement and scrutiny private equity sponsors face in terms of antitrust and foreign direct investment considerations. There has also been a rise in second requests and a more labour-intensive process for deal approvals. In addition, he highlighted the jurisdictional differences in regulatory focus, with the United Kingdom being more active in blocking transactions and foreign direct investment receiving significant attention. In this regard, he mentioned that reconciling the requirements of different jurisdictions presents a significant challenge for private equity sponsors, especially in terms of timing and information.

On this subject, Audrey Chen provided insights into the Asia Pacific region, focusing on China’s evolving competition laws and regulations. She acknowledged that the evaluation of transactions in China has become busier. However, the review process is generally efficient, with transactions often completed within four to six weeks.

Finally, Schmidt, Napolitano and Kelly commented on how regulatory hurdles are affecting dealmaking and discussed possible ways to overcome these new challenges.