PRIVATE EQUITY GROUPS HUNT FOR NEW EXIT STRATEGIES AS CASH PILES UP / THE FINANCIAL TIMES

Private equity groups hunt for new exit strategies as cash piles up

Investors must get creative to get out of ‘a towering backlog’ of older investments and put new funds to work

Antoine Gara in New York and Ivan Levingston and Will Louch in London

Buyout groups have been left with a record $2.8tn in unsold investments © FT montage/Bloomberg

The private equity industry has entered 2024 with record amounts of unspent investor cash and an unprecedented stockpile of ageing deals that firms must sell in coming years.

Private equity firms were sitting on a record $2.59tn in cash reserves available for buyouts and other investments as of December 15, according to S&P Global Market Intelligence. 

Nearly a quarter of that cash was held by 25 of the industry’s largest groups, including Apollo Global, Blackstone, KKR, CVC Capital and Advent International.

Industry executives and their advisers believe the new year presents a big test for private equity investors as they seek ways to sell down large investments while searching for new opportunities.

With the market for IPOs still lukewarm and global dealmaking slow, the number of private equity exit transactions last quarter was near a decade low, according to consultancy Bain & Co.

That has left buyout groups with a record $2.8tn in unsold investments and what Bain described as “a towering backlog” of companies to exit.

“What we are seeing from private equity owners is a lot of anxiety because it’s unclear how [asset sales] will evolve,” said a senior mergers and acquisitions banker.

The conditions have frustrated many large institutional investors that normally expect a regular flow of cash to be returned to them as private equity groups sell down profitable investments. 

Instead, these investors have received just a trickle of money over the past five years, even as they committed enormous sums to fund new buyout deals.

Bankers expect groups to put their cash to work in the coming months while also striking deals to sell off old investments — especially as optimism grows that US interest rates have peaked after the sharpest rise in decades.

“I felt like [2023] was a year where people were digesting their portfolios. 

Hopefully, 2024 will be a reset for an acceleration in deals again,” said Elizabeth Cooper, partner and co-head of Simpson Thacher & Bartlett’s private equity mergers and acquisitions practice.

“There’s a lot of deals in the pipeline for the first half and we expect that a good number of those will go through as planned,” said Carsten Woehrn, co-head of Emea M&A at JPMorgan.

In order to get deals done, many private equity groups have deployed financial engineering tactics to bridge a disconnect between what buyers will pay for a company and what owners will accept.

Charles Hayes, global co-head of private capital at Freshfields Bruckhaus Deringer, said firms were increasingly turning to “structured transactions” — deals that utilised equity with debtlike features.

Industry sources told the Financial Times that private equity groups selling businesses to each other had increasingly used complex structures. 

Those included performance-based earn-outs — which pay sellers additional cash if a business performs better than expected — or other tools such as deferred payments from buyers and large rollover investments from sellers in order to get deals done.

Bankers and private equity executives are also growing excited about corporate carve-outs, in which a private equity firm buys a business line from a large corporation.

The largest private equity deal of 2023 was GTCR’s carve-out of payments company Worldpay from FIS at an $18bn valuation. 

FIS had abandoned a plan to spin off Worldpay into a publicly listed company, and instead sold 55 per cent of the business to GTCR in a deal that brought the seller $11.7bn in cash.

Many large buyout firms are looking to replicate those large carve-out deals in 2024, according to Max Justicz, Americas co-head of financial sponsors at UBS.

“The mega buyout firms are looking to demonstrate that they can buy carve-outs with some management expertise and plenty of dry powder,” he said.