Global private equity public-to-private deals numbered 96 for the year to Oct. 25, already the highest annual total in 16 years, according to Preqin data.
Although deal financing has been tight, "the dislocation in the stock market has played a meaningful role" in public-to-private transactions, said David Klein, a corporate partner at Kirkland & Ellis who has worked on a number of take-private deals.
Earlier this year, public markets fell to levels that made asset valuations attractive, creating buying opportunities, while private market valuations appeared elevated by comparison, Klein said. Additionally, special purpose acquisition companies, which went through a listing boom in 2021, began to delist.
"A large number of those were really distressed situations," Klein said. "That also created a wave of take-private opportunities where clients maybe like the business and recognize that the public markets were not valuing them the way that they thought they should be valued."
As opportunities rose, competition from corporate strategic buyers declined, Klein said.
Corporations, which typically compete with private equity on deals, were more restrained in acquiring assets due to downward pressure on their own stock prices, a stricter M&A regulatory regime, inflation and recession concerns.
"The result was, we saw a lot of our [private equity] clients where maybe historically the public market was a smaller part of their overall set of business [and those] targets become an increasing piece of their business," Klein said.
Conventional credit markets have been tight, but some private equity buyers have found alternative ways to finance deals such as private credit, Klein said.
Software companies have been popular targets. Four of the largest take-private deals in the last five years have been in the software sector. This year two notable deals were Silver Lake Technology Management LLC and Canada Pension Plan Investment Board's acquisition of experience management software provider Qualtrics International Inc., and Francisco Partners Management LP and TPG Capital LP's agreement to buy engineering software platform New Relic Inc., expected to close later this year or in early 2024.
"Software deals historically tend to use less leverage," so in this year's restrained loan market, financing was not as big of an issue as it has been in other industries that require more leverage, Klein said.
Robust M&A pipeline
The record for public-to-private deals was set in 2007, when private equity took 142 public companies private, according to Preqin. This year's pace could continue as relatively stabilized public markets make asset buyers and sellers more comfortable with transactions.
"The pipeline right now on M&A overall looks very strong," Klein said. "Conventional banks have become more willing to lend, so financing has certainly become more available overall. I don't know if take-privates will be at the same record pace that we saw in the past year, but it's certainly looking very active."