The UK’s largest leveraged buyout in recent years, CD&R’s takeover of Morrisons, shows the risk of buying at the wrong time.
Morrison’s debt pile has swelled to nearly £7bn since the deal was agreed, leaving its interest payments heavily exposed to the even slightest nudge in interest rates.
Asda’s takeover by TDR Capital and the Issa brothers, which included the largest sterling corporate bond sale of all time, has also raised eyebrows.
Interest costs on Asda’s debt pile has been surging every year due the cost of servicing the debt.
The main bear trap for private equity titans to avoid now is striking a deal which in 12 months looks expensive.
From Dip Dabs to real estate
Before rising to become a $1 trillion fund manager, Blackstone backed cottage industries and the pivot away from traditional UK private equity is also hampering deals.
In the UK it owned retro sweet-maker Tangerine Confectionery, which owned Dip Dabs, Flumps and Wham bars.
But now Blackstone and its giant peers KKR and Carlyle are less likely to plough money into Dip Dabs and more prone to allocate their billions into esoteric credit and real estate investments.
This has led to a lack of jumbo dealmaking by private equity firms, leaving smaller players like CD&R and TDR Capital to keep the market ticking over.
Mega deals worth over $1bn accounted for less than half of all European buyouts for the first time since 2017, according to CMBOR, with smaller deals picking up the slack.
Still, one hope for a return to dealmaking is the pressure private equity firms are under to exit businesses and return cash to investors.
According to research from Baird, private equity exits hit a 10-year low in 2023, piling more pressure on firms to clear the mountain of companies backing up their books.
It could mean private equity firms may become more aggressive in seeking to offload these companies in 2024, Baird said.
Game changer
IPOs are the biggest laggard, so could see the largest revival. Just 82 private equity-backed IPOs came to market this year, versus 392 in 2021, according to Preqin.
“We have seen an upswing in activity and interest in moving on investments,” a second senior UK banker, who wished to remain anonymous said. “They have to churn their portfolios and prove they can make the money back. Generally the good quality assets are going out first.”
Interest rates are likely to remain the driver, however, for the amount of dealmaking in 2024.
Traders are betting that the Bank of England will slash rates by almost two percentage points to 3.5pc next year. That’s seven rate cuts.
The Fed is also expected to reduce rates, perhaps helping give more clarity for private equity firms hoping to make deals happen.
“2023 was a tougher year due to the uncertainty. No macro scenario prevents deals but it makes it very hard to write deals when you don’t know how that’s going to play out,” said Luck. “If we enter a period where there is more visibility and more certainty it will give people greater confidence to be proactive.”
Amen to that.
