Buyout firms are finding it increasingly difficult to close deals as the uncertain macro environment, increased debt costs and choppy fundraising have posed significant headwinds. A number of M&A processes in recent weeks have either been halted or delayed as market volatility and rising rates have ended the era of cheap money and easy profits.
Case in point, Advent International pulled a full sale of €4 billion French biometrics firm Idemia earlier this year and opted for an amend-and-extend of its €1.45 billion and $642 million term loans due January 2026 to September 2028. Similarly, BC Partners, which completed a first round of bidding for the sale of UK-based VetPartners last month, is now exploring other options as deal talks failed amid a disagreement on valuations, according to market sources.
“This [slowdown] has more to do with valuation expectations and the issue is more about what’s fair value for an asset in an environment like the one we face today,” said Marc Chowrimootoo, portfolio manager at Hayfin.
Elsewhere in the European middle market, at least four auctions have hit trouble in recent weeks. This includes a potential sale of German panel saw manufacturer Altendorf. The sponsor hired Houlihan Lokey to advise but is now looking at refinancing due to a poor response. German audio equipment specialist d&b audiotechnik, meanwhile, has received muted interest from potential buyers to its sales process.
“The acquisitions have been dragging in the first half of the year. The pipeline is strong, but buyers are more selective and there is still buyer-seller mismatch in terms of pricing expectation,” said Laura Rusu, founding partner at Swiss advisory firm Rosedge Capital, adding that it is hard for the sellers to pull the trigger, which is why there have been many broken deals recently.
PitchBook data show that M&A by deal value in the first two quarters of this year is down 63% from 2021 and 56% from last year. To be sure, 2021 was the peak of dealmaking, which came on the back of the economic rebound post reopening from pandemic lockdowns.
“The buyers seem frustrated with these broken deals and are even more cautious to enter auction processes and incur fees,” added Rusu.
Slower M&A activity in Europe was also one of the key worries at the SuperReturn International 2023 event earlier this month. A panelist echoing the same sentiment added that there is definitely a gap between what sellers expect to receive in valuation and what buyers are willing to provide, especially for medium performing assets. The panelist said this leads to longer processes, and in some cases, pulled processes.
And 25% of the total large cap and 15% of the mid cap deals are going back (to the original sponsor), according to Raphaëlle d’Ornano, founder and Managing Partner of D’Ornano + Co, a financial advisory firm to both mid cap and large cap firms.
“Both the buyer and sellers are not expecting the same things, and even private credit firms are doing much deeper due diligence to gain the conviction,” she added.
And there is a real struggle to close the deals on time. LCD spoke to at least four advisers who agreed that while they are seeing an increased pipeline of deals, it is taking a lot longer to close deals on time.
“We have been working on a few acquisitions’ financing processes, but they have been delayed as the buyers and sellers could not agree on pricing. We expect that the processes will be resumed after summer,” Rusu of Rosedge added. “Leverage is tougher to find, and lenders are more diligent in their analysis, but there is still capital in the market from both banks and alternative lenders.”
A legal advisor to M&A deals told LCD that they are four months behind their schedule of closing a buyout deal in the UK, due to disagreements over valuations.
Going private
Amid the volatile environment, some sponsors are even resorting to bilateral discussions. “There has been reluctance to be very public about going public with the sale processes, and there are more bilateral discussions happening which are off the radar,” said HayFin’s Chowrimootoo. “There are some deals we started talking about in January and February this year that are still not done,” Chowrimootoo added. “This is in addition to the lot of add-on activities happening right now due to slowdown in M&A activity.”
“We are seeing significantly more sponsors coming direct and bilateral for lending solutions in the current environment instead of going for auctions. They are overweighting certainty of delivery and finance as opposed to getting the cheapest price and most leverage,” Callum Bell, Head of Direct Lending at Investec, said.
Chowrimootoo is, however, hopeful of a rebound toward the end of the year, after the summer lull.
“January was dead, February quiet, March-May has been busier but has still been well off the general pace, July and August are typically quiet months from an M&A perspective. So you really are relying on a heavy Q4, and based on the tone of the sell-side banks, more things are being prepped right now for launch,” he said.
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