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On the podcast: Private equity’s fast rebound, rising valuations and surging SPACs

To kick off Season 3 of “In Visible Capital,” reporter Adam Lewis takes a closer look at the state of private equity, including SPACs, government regulations and the post-pandemic future.

To kick off Season 3 of “In Visible Capital,” private equity reporter Adam Lewis takes a closer look at the state of private equity. Topics include PitchBook analysts forecasting SPAC deal activity, discussing the possibility of government regulation for the asset class, predicting private equity fundraising in the near-term, and connecting why corporate carveouts continue to be a reliable investment strategy for investors and a needed source of cash for companies trying to shore up their balance sheets in the wake of the worst of the COVID-19 pandemic.

Listen to all of Season 3 and subscribe to get future episodes of “In Visible Capital” on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at [email protected].

Download the presentation or report, and watch the full Private Equity Outlook webinar here.


Adam Lewis: Hello, and welcome back to PitchBook’s “In Visible Capital” podcast. Today we’re kicking off Season 3, which will take a look at the evolving impact of the private markets on our lives. I’m Adam Lewis, a reporter for PitchBook News, and I’ll be trading hosting duties this season with PitchBook News editor Alec Davis.

In today’s episode, we’ll begin with SPACs, aka special-purpose acquisition companies, aka blank-check companies, which have become the talk of the finance world over the past year. For private equity, they present a dilemma. On the one hand, they represent an opportunity to buy more companies without using their own money, which is every investor’s dream. And on the other hand, they’ve led to a massive increase in competition for a finite number of companies, often driving up the price. They’ve also become an option for PE firms to cash in on their investment.

We saw a recent example of that when Abry Partners sold Kore Wireless, a telecom company based in Atlanta, to a blank-check company backed by Cerberus Capital Management in a deal that valued Kore Wireless at around $1 billion.

So far, there have been no signs that these sort of SPAC deals will slow down. In our recent Private Equity Outlook webinar, our analysts Dylan Cox and Wylie Fernyhough made some predictions about Private Equity. And that included Wylie making a bold prediction about the continued popularity of SPACs this year.

Wylie Fernyhough: I think there’s going to be good amount of SPAC deal activity, and so our prediction is that there will be at least 20 private equity-backed companies who’ll enter the US public markets through a reverse merger with a SPAC. We can see the fundraising activity that’s happened with SPACs just last year in terms of, you know, IPOs, and we’re already, I believe, the second-highest year ever in 2021 in terms of SPAC fundraising, just four weeks into the year. And so it really shows that that has not slowed down.

We saw Blackstone recently agreed to sell Alight to a SPAC at a $7.3 billion valuation. We’ve seen Blackstone and CVC move to sell Paysafe to a SPAC at a $9 billion valuation, and [...] I think, especially in the US market is kind of an industry bellwether and so. While there may have only been two or three private equity-backed companies to go public versus back last year, we think that’s easily going to go up tenfold, and you know 20 might actually look conservative. We’ll see.

There’s also been several private-equity backed SPACs, so whether the sponsor was HIG or Thoma Bravo, it’s interesting to see private equity get involved in this in a different way, until maybe being on the buy-side of the SPAC, as well as on the sell-side or sponsor side. Anecdotally, there’s one upper-middle-market firm that was giving a talk, and they said that they are currently receiving over a dozen phone calls a week from different SPAC sponsors that have pilfered through their current portfolio companies and say, “Hey, we want some financial services. We think we would like any of these three companies. Let us know what you want to sell,” or they’ll just have unsolicited offers and so.

These SPACs are extremely hungry to get a deal done, as you know, I’m sure. A lot of you know that the structure is that they typically have a two-year call option to get some of these deals done and with the way it works, you are highly incentivized to get a deal done, and sometimes it doesn’t really matter as much on the price. And so, while we may see some changes to governance, we think SPAC activity is going to pick up. The one caveat, I would say is that in a lot of these deals, you may be selling 20% or 30% of the shares and the rest you have to have in the public markets, then sell them over time. It does give you additional upside potential, but a lot of the sponsors out there that we’ve talked to here are a little hesitant, so I think SPACs will have to really pay up to win some of these deals.

Dylan Cox: So much like IPOs out of portfolio companies when they’re not full majority-stake liquidity events all at once, but sort of come over time.

Wylie: Exactly.

Adam: SPACs have drawn increased scrutiny of late, with more short-sellers emerging to weigh down the share price of companies such as Clover Health, Nikola and Lucid Motors, all of which went through a reverse merger with a SPAC to enter the public markets. And with unproven investors and celebrities such Alex Rodriguez, Colin Kaepernick and Sammy Hagar of Van Halen fame jumping into the SPAC frenzy, it’s fair to wonder if SPACs have reached bubble territory or whether they’ll face more scrutiny from regulators. Here’s Wylie again.

Wylie: I’m not going to predict anything on the regulatory side, just because I think that can and does change pretty frequently, but I think we’ve seen a real hunger for SPACs because they help solve a financing issue for complex companies. Whether it’s this Dyal-Owl Rock deal, where it was a complex deal to have to combine two different asset managers and go public simultaneously, and really the only option that they saw was to do it was through a SPAC.

Whether it’s, you know, the Paysafe deal where CVC and Blackstone are exiting, I think it’s an attractive option in a lot of cases, and I would say there’s a better chance for regulatory oversight or scrutiny if maybe the SPAC sponsors hadn’t increased in their quality in the last year, especially. But now that we’re seeing, what I would argue, is a much more institutional base in terms of SPAC sponsors, I think that risk kind of goes down quite a bit, especially as we’re seeing more equity or large banks and asset managers back some of these factors. It’s no longer the dark Wall Street underbelly where there’s the kind of sketchy financing option for maybe lower-quality companies. I think that’s kind of changed pretty substantially in the last 18 months, so I would push back against that.

Adam: The great SPAC boom of 2020 came in a year that saw PE fundraising decline to a five-year low during the pandemic. But with vaccinations picking up, fundraising is expected to rebound this year. Institutional investors such as pensions and endowments have signaled they want to increase their allocation to investment funds such as private equity.

Both Wylie and Dylan predicted PE fundraising in the US will exceed $330 billion in 2021, setting an annual record. And the sector is already off to a raucous start. Last month, Clayton, Dubilier & Rice (CD&R) amassed $16 billion for its latest flagship fund, blowing past a $13 billion target. Here’s Dylan predicting a continuation of this trend.

Dylan: We think US PE fundraising will surpass $330 billion in 2021. That would be a new record if we reach that figure, even surpassing pre-global-financial-crisis records. A couple main reasons we expect that to take place: First is that institutional allocators—sovereign wealth funds endowments foundations, insurance companies, pension funds—both anecdotally and in survey data, they’re saying that they’re looking to increase their target allocations both to private equity and to private markets or alts more broadly. And so, as those target allocations increase, you know, we expect that to take a couple of years for them to meet those target applications, and fund managers have been more than happy to oblige. They’ve been increasing their target fund sizes, taking on more and more commitments, especially in private equity in the last years. I looked at some data just the other day and upwards of 95% of all funds are larger than their predecessor vehicles, so really, growth across the board for PE fund managers.

The second reason we might see fundraising grow quite substantially is something we refer to as the reverse denominator effect. In past crises, in the global financial crisis, when we saw public equity portfolios and other parts of institutional portfolios really take a nosedive, it effectively increases your allocation to private markets. And so, in a long bull market like this, or in the rally that we’ve seen since last March, and it has the opposite effect, and institutional investors are effectively under-allocated [and] are often put below their targets because the other parts of their portfolio are growing in value so much. And so, even if their targets are remaining constant, their dollar allocations to the asset class will have to increase.

We’ve already seen quite a few fund managers call final closes or announce large fundraisers this year. Wylie, you and I were talking before we got on the air about it. I believe it’s a Thoma Bravo fund, about $20 billion, that’s in the market right now, and a couple other tech-focused funds that are really driving a lot of this growth.

Wylie: Yeah exactly. We’ve also seen Dyal, the big GP stakes manager, could be closing on about a $10 billion fund in the first or second quarter, and Hellman & Friedman also launched a $20 billion fund, so extreme fundraising activity already.

Adam: Over the past year, the public markets have seen company valuations soar as retail investors dove head-first into the market for the first time. Meanwhile, many PE firms in the US were scouring for bargains to find companies that were negatively impacted by COVID-19. For investors such as Apollo Global Management, the drop in valuations proved to be an opportunity. The firm tapped its Hybrid Value fund to pour billions into distressed companies such as Expedia and Vistaprint, making PIPE deals that have already paid off. But those bargains may be few and far between as valuations are expected to once again skyrocket in 2021 as the economy rebounds. Here’s Dylan again on our predictions for valuations.

Wylie: In private equity, we’re predicting that 20% of buyouts will be priced above 20 times EBITDA. Similar to Wylie’s prediction about SPACs, I think 20 was sort of a number we pulled out of the sky, but the broader point here is that pricing is set to increase for a number of reasons.

One of those is just that public equity comps are increasing in valuation as well. If you look at price-to-earnings ratio for the S&P 500, they’re well above where they were one to five years ago and, of course, private assets are marked to market with their public comps.

The second reason is that the composition of private equity targets is changing. You mentioned some of those tech-focused ones earlier. It’s more often the case today that private equity firms are not looking at your typical mid-market industrial firms that are maybe being carved out somewhere, but they’re relatively young, high-growth companies with a lot of runway to go. And so sometimes they’re even valued under multiples of revenue, not EBITDA. And so, if you look at multiples of EBITDA, it can be pretty astounding. It’s not uncommon these days to see, you know, we see some transactions in the last year at 30 or 40 times EBITDA for some of these businesses, which, for a lot of private equity managers probably sounds unrealistic or just outrageously off the charts, but it’s what the data really proves out.

Wylie: I think private equity firms in general have been looking at different types of deals. It’s been really interesting to watch them transition from cost cutting and financial engineering into more of the growth aspect. And so, whether that is technology or health care or even certain industrial companies that are pretty quickly growing, there’s a lot of interest in private equity and in paying for a little bit of a quality asset and then figuring out how to still be able to eke out a pretty attractive return from that.

I think what we’re seeing is, to your point Dylan, a change in terms of how a lot of these buyouts are done, whether it’s increasing in technology as a proportion, or focusing more on growth-oriented deals across all types of sectors.

Adam: In the face of rising valuations, private equity firms have used carveouts as an investment strategy going back decades to put capital to work. It’s arguably the most complex type of leveraged buyout. And it happens when a private equity firm buys out a division of a major conglomerate, takes it private and then often rebrands altogether. We’ve already seen it a lot this year, notably when The Carlyle Group acquired Flender, a maker of electrical and mechanical drive systems, from Siemens in deal worth more than $2 billion. Here’s Wylie and Dylan discussing the role of carveouts as strategies shift within private equity.

Dylan: I mentioned carveouts, that PE firms aren’t just sticking with their bread and butter of carveouts of mid-market businesses are maybe as exciting, but we do expect an increase this year so what’s going on there.

Wylie: I think this actually plays off of your prediction pretty well, which is that we are seeing just an increase in pricing in the market, and so one of the ways that private equity firms are looking to combat that is with carveouts.

I think one of the big reasons is that corporates in 2020 brought a lot of debt onto their balance sheet in order to survive the pandemic. A lot of them have to lever up pretty substantially, and what we’re seeing now is maybe street analysts and as well as CFOs look to say, “Okay, let’s maybe try to shore up the balance sheet a bit. Let’s maybe do one or two divestitures and maybe focus a little bit more on core competencies.”

I think on the private equity side, carveouts have always been pretty attractive, and one of the things that we note in this report was the Carlyle CEO said that they were as busy as they’ve ever been on [the] large scale of corporate divestitures looking at PE firms buying from some of these big corporates.

One interesting anecdote on this was the HIG transaction that happened, I think, in Q3 2020. They did a carveout from Johnson Controls, and so they carved out an HVAC company that has three distinct, you know, business lines, and HIG took control of that. It was a very complex deal, and then they’re actually carved out one of the three business lines from that carveout, so they, you know, carve out, then a carveout. So they sold off the higher-priced piece of that business, you know, [and] got a pretty attractive entry multiple when you account for what they were able to exit the other piece of the company, and so through that complexity, they were able to get a pretty attractive-looking company out of a pretty reasonable valuation, as maybe would have expected in 2013 or 14, and it was because they were, you know, willing and able to go through the complexity of two carveouts in one deal, and so, you know, I think going forward it’s going to be something that PE firms are looking for, and corporates also looking to divest.

Dylan: Absolutely, not to mention the DOJ guidance recently about PE firms being a preferred acquirer of forced divestitures but definitely on the list of potential acquirers.

Wylie: To that point, one of the reasons that was given is because there’s been a wholesale change in terms of how private equity firms look to extract value from portfolio companies. And to hammer that point home, it’s no longer about just slash and burn. There’s a lot of firms that are actually looking to add value, to do add-ons, to grow these companies, and create something that is more valuable than when they started with—not just some of the baseline cost-cutting, which is really just table stakes at this point.

Adam: Regardless of which predictions come true, private equity will continue to have a growing role in the investment landscape. Thanks for listening to this week’s episode of PitchBook’s “In Visible Capital” podcast. For more information, including links to the report and webinar covered in today’s episode, visit Please rate and review the show to help others discover the podcast and join us next week for a look at venture capital. Until next time.

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