There’s a Wall of Assets That Need to Change Hands
The quest for increasing distributed to paid-in ratios has led to a more fluid M&A market that leans in favour of buyers, according to the co-head of Goldman Sachs Asset Management’s private equity business.
London-based Michael Bruun told Private Equity International that these conditions are playing out in three ways: better valuations for buyers; more time and potentially more exclusivity as a buyer; and enhanced downside protection for buyers when structuring deals, such as via the use of earnouts for sellers or guaranteed minimum returns for buyers.
“Big sums of capital have been raised, and not necessarily all of that capital has been returned to the extent that the industry has seen in prior years. It has created a wall of assets that needs to change hands over a reasonably measured period of time,” Bruun said.
“The issue for the industry is that less capital has been returned from deals made between 2019 to 2021, leading to less DPI and a prolongation of hold periods.”
There is a nervousness among some sellers around taking their assets to market for fear of failure or fear of having to transact below their expectations, Bruun added.
“There is less competitive tension, and that is leading to nice new deal formation [structures], from our perspective.” While enhanced downside protection is present at any moment during a cycle, Goldman has seen more of these transactions recently, Bruun said.
According to a study by Jeffrey Hooke, a senior finance lecturer who specializes in alternatives at Johns Hopkins Carey Business School, brand-name large-caps funds are holding onto significant amounts of unrealised value. Of the 51 private equity funds in the study, those between seven and nine years old still hold 50 percent of their stated asset value as unsold deals. This proportion sits at 34 percent for funds that are 10-12 years old.
In May, GSAM said its private equity business had agreed to acquire environmental risk reduction and advisory services firm Adler & Allan from Sun European Partners. The following month, it agreed to acquire French wealth management services and product provider Crystal, which has around €22 billion in assets under management.
One way managers have been delivering liquidity for their LPs is via GP-initiated secondaries processes. In a study of UK mid-market managers by investment bank Deutsche Numis last October, continuation funds were ranked as the most preferred exit method, above dual-track processes, IPOs and private auctions.
While continuation vehicles can be relevant for many situations, Goldman’s direct private equity platform is yet to utilise this strategy to exit any of its assets, Bruun said. So far, exits to strategic buyers have been the platform’s “most prevalent option”.
“It’s very important in your investment methodology that you have a clear view the day you enter [of] how you’re going to get out of the asset,” Bruun said. When investment committees are considering buying an asset, they should think about why this may be an attractive asset to another buyer in future and what the next buyer would likely pay. Evaluating managers who use continuation vehicles extensively can be a tricky exercise, he added.
Managers need to be careful not to overextend themselves in over-utilising the continuation route, he added.
Affiliate title Buyouts reported in February that Goldman had engaged adviser Evercore to explore a continuation fund process on West Street fund portfolio company Omega Healthcare. The deal would move the healthcare management services company out of its current fund, and into a continuation vehicle.
A spokesperson for GSAM declined to comment on the continuation fund.
Bruun said that overall, conditions have led to what is increasingly a buyer’s market.
“Valuations are slightly better seen from a buy-side perspective. You get more time and exclusivity if you engage as a willing buyer – that’s helpful for the depth of the diligence you can do, for deeper underwriting and planning for value creation.”
