The rise of private credit is powering a surge of private equity-backed take-private transactions that began when public market valuations dipped in 2022.
Take-privates typically account for about 20% of private equity deal value, but that share doubled to about 40% in 2023, said Pete Witte, global private equity lead analyst for research and consulting firm EY. Less than three months into 2023, take-privates accounted for 70% of the year's private equity deal value, Witte said.
"That's the most interesting statistic in all the private equity right now. That sharp pivot for these kinds of deals," Witte said.
One factor is the broad decline in the value of public market companies, which has private equity hunting for deals. The S&P 500 fell 18.11% in 2022 amid surging inflation, rising interest rates and a more uncertain global economic outlook.
Another driver for take-privates is the growing prominence of private credit in private equity dealmaking in response to tighter lending standards from banks, Witte said.
"Consortiums of private lenders are coming together in ways that we haven't really seen before to finance some of these larger deals ... even in the absence of traditional sources of financing," Witte said.
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One key ingredient in many of those consortiums is a "legacy sponsor" who already has a financing agreement in place with the target of the take-private deal, said Ryan Rafferty of law firm Debevoise & Plimpton. That old debt held by the legacy sponsor likely predates the run-up in interest rates that began in 2022, Rafferty said, adding that it "probably has really attractive yields on it right now."
"If you can structure a deal in that way, there's a lot of value to be unlocked by not having to reprice that debt and maintaining the lower cost of capital," Rafferty said.
He said one recent example is Clayton Dubilier & Rice LLC's $4.23 billion deal for wealth management firm Focus Financial Partners Inc., which ranks as the second-largest take-private deal of the last six months.
The value of private equity-backed take-private deals declined nearly 19% year over year in 2022 to $78.52 billion. But private equity-backed entries of all types declined even further last year — down nearly 39% from a record-setting 2021 — demonstrating that take-privates remained relatively compelling compared to other new investment opportunities.
Private equity firms announced $16.07 billion in take-private deals between Jan. 1 and March 9, compared to $23.86 billion in the full first quarter of 2022.