Carving out opportunities in PE

Somewhat quietly, PE-led carveout acquisitions in North America and Europe have reached high levels in recent years, per PitchBook’s 1Q 2018 M&A Report. This is a natural and sometimes overlooked consequence of M&A booms, especially today’s. Corporate buying sprees have their own logic to them, and when public companies announce plans to buy or sell certain non-core assets, they learn very quickly what the market thinks of their new plans via share prices. Some of the increase has been spurred by pesky activist investors, who have become much more skilled in the art of effective agitation. Hedge funds and private equity buyers often tag-team in these situations, and we wouldn’t be surprised to see more of that as activists become increasingly influential.

More broadly, though, we expect to see more PE-sponsored carveouts due to the sheer number of M&A deals over the past five years. Some 87% of corporate respondents in a recent EY survey said they intend to begin their next divestment plans within two years. That’s high, but not surprising. Several industries are being reshaped as we speak, and selling assets can be just as useful as buying them when it comes to sorting out synergies and new business priorities. The government has been chiming in more often, as well—anti-trust concerns have become much more common from the current administration.

M&A carveout/divestiture deal flow in North America & Europe by year

All of this presents a significant deal-sourcing opportunity for PE, especially since orphan businesses often sell at a discount in an otherwise pricey environment. Private equity has been involved in a number of billion-dollar-plus carveouts this year, including the massive $20 billion divestment of Thomson Reuters’ financial & risk business to a Blackstone-led consortium. The middle market should see its share of opportunities, but they’ll generate far fewer headlines than the blockbuster sales.

This column originally appeared in The Lead Left.