Analysis: Banking turmoil takes the leveraged out of the buyout

Qualtrics International

23/03/2023 10:00

By Chibuike Oguh and Anirban Sen
       March 23 (Reuters) - Private equity firms that acquired
companies since the banking crisis started on March 8 have
funded the deals mostly with their own funds, a departure from
traditional leveraged buyouts that reflects their struggle to
secure cheap debt. 
    Four acquisitions of companies by private equity firms that
were announced in the last two weeks were funded by debt that
accounted for between 9% and 50% of the deal consideration,
according to a Reuters review of regulatory filings. The
remainder was equity checks by the private equity firms.
    Typically, debt accounts for between 60% and 80% of the deal
consideration, allowing the buyout firms to juice returns.
    Private equity executives and their advisers say the shift
towards more equity financing started before the turmoil in the
banking sector this month, as the rise in interest rates over
the course of the last year made debt more expensive, and fears
about an economic slowdown made lenders more risk-averse. 
    Yet this trend picked up steam after three U.S. banks
collapsed this month and concerns over the banking sector's
resilience forced many lenders to retrench, they added.
    "Private equity investors are having to pick their spots and
need to have very strong conviction to be able to get a deal
done," said Rob Pulford, partner and head of the financial and
strategic investors group at Goldman Sachs Group Inc  GS.N . 
     When Blackstone Group Inc  BX.N  clinched the $4.6 billion
acquisition of U.S. cloud-based event-software provider Cvent
Holding Corp  CVT.O  from Vista Equity Partners on March 14, it
only borrowed $1 billion for the deal. The rest came from
Blackstone, the Abu Dhabi Investment Authority, and Vista, which
rolled over a portion of its stake in Cvent.   
    In similar fashion, Silver Lake and the Canada Pension Plan
Investment Board agreed on March 12 to buy data analytics firm
Qualtrics International Inc  XM.O  for $12.5 billion by using
only $1 billion in debt. 
    Apollo Global Management Inc  APO.N  signed an $8.1 billion
agreement to acquire specialty chemicals distributor Univar
Solutions Inc  UNVR.N  on March 14 by using debt for only half
the deal consideration.
    Symphony Technology Group agreed on March 13 to acquire
Momentive Global Inc  MNTV.O , the owner of online survey vendor
SurveyMonkey, for $1.5 billion while using only $450 million in
debt.
    Six private equity firms polled by Reuters said they had not
adjusted down their typical 20% annualized return expectations
in light of the tough debt financing environment. They requested
anonymity because such figures are kept confidential between the
firms and their investors. 
    Bob Rivollier, a private equity partner at law firm Ropes &
Gray, said that many buyout firms that rely heavily on equity
financing believe it's possible to achieve the returns they have
seen in the past by adding debt to the companies they buy down
the road. This has made return assumptions on these deals more
precarious, he added. 
    "Equity isn't cheap. Between a deal where 40 percent is
equity and 60 percent is debt and one where 100 percent is
equity, you're going to need a much higher return for the equity
deal to get the same overall return to your investors,"
Rivollier said.
    
    REFINANCING RISK
    To be sure, a  handful of private equity firms have already
been accustomed to this kind of refinancing risk. Vista and
Thoma Bravo are among the private equity firms that in the last
12 months have been buying companies with mostly equity
financing with plans to add debt to them later. They do this to
avoid lengthy negotiations with lenders while they hurry to
clinch deals with sellers. 
    An upside to the shift toward equity financing, dealmakers
say, is that the companies owned by the private equity firms
have more cushion to absorb losses if their business
deteriorates. Many of the leveraged buyouts that became
bankruptcies in the wake of the 2008 financial crisis were the
result of private equity firms saddling companies with debt to
the hilt.
    Jonathan Rouner, vice chairman of investment banking at
Nomura Securities, said private equity firms reserved the option
when to add more debt to their companies when it's possible and
safe to do so.
   "You fund the investment with equity and, when financing
markets recover, do a large financing to take your equity back
out," Rouner said.

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 (Reporting by Chibuike Oguh and Anirban Sen in New York;
Editing by Greg Roumeliotis and Jonathan Oatis)
 ((Chibuike.Oguh@thomsonreuters.com; +332-219-1834; Reuters
Messaging: chibuike.oguh.thomsonreuters.com@reuters.net))