Never mind the return to normal, Wall Street’s private equity shops are staging a return to abnormal. Leveraged buyouts are happening at a speed and extravagance that had been unique to 2006 and 2007, the run-up to the financial crisis.
Private equity firms have already made $470 billion of acquisitions this year, including Blackstone Group Inc.’s deal announced Monday to take data-center operator QTS Realty Trust Inc. private for $10 billion. If that headline didn’t transport you back 14 years, this one from Saturday almost certainly will: Blackstone has separately teamed up with Carlyle Group Inc. and Hellman & Friedman on a $34 billion LBO of medical supplier Medline Industries Inc. (all prices include debt). At this rate, the value of private equity purchases in 2021 will surpass the total for all of 2020 in just a few weeks, according to data compiled by Bloomberg. This year might even break the 2007 record.
The buyout frenzy is just one more anomaly of the Covid-19 crisis. Markets, housing demand and prices of goods have all soared in the face of a deadly virus that had ground the global economy to a halt. Activity is pumping along largely because of low interest rates, fiscal stimulus and highly effective vaccines (in countries where they’re available). In the case of private equity, it’s mostly about rates. That single input has helped to offset skyrocketing takeover valuations and enabled higher debt ratios, even as regulators discourage the pre-financial-crisis practice of dangerously loading up some buyout targets with more debt than they can withstand.
For deals worth at least $1 billion, the median Ebitda multiple has risen from single digits a decade ago to 14.5 this year. “An investor in 2020 paid at least 30% to 40% more than would have been necessary a decade ago to acquire the same Ebitda,” according to a McKinsey & Co. report in April. That trend is why renowned dealmaker Warren Buffett has stayed on the sidelines the last few years, choosing not to compete with growth-hungry strategic buyers and private equity firms armed with record levels of committed capital. Meanwhile, companies acquired by private equity are carrying 6 times more debt on average than the Ebitda they’re able to generate in a year; that ratio even surpassed 7 at the end of 2020.
Technology businesses — which fetch especially rich valuations in public and private markets — have become a new favorite for private equity because they tend to promise better paydays. Tech-focused buyout funds generated internal rates of return that were 6.4 percentage points higher than non-tech funds over the last decade, the McKinsey report said. And given all the strategies and asset classes competing for investors’ money, it doesn’t hurt to be pitching a fashionable industry.
The embrace of tech is also part of a broader change to the private equity blueprint. Instead of aiming to ruthlessly slash costs, some buyout funds are chasing growing businesses in a bid that they can keep increasing sales, often while keeping the same management team in place. The Medline mega-LBO this week is one such example — the only thing it appears to have in common with club deals of the 2007 vintage is the amount of money and firms involved.
Bumble, the popular dating app, is another example of private equity chasing growth rather than mature businesses that offer the opportunity to shrink cost-line items. Blackstone bought a majority stake in 2019 that valued Bumble’s parent company at $3 billion. In February, just 15 months later, Blackstone took Bumble Inc. public, and it now has an $8.6 billion market value. “What stood out about Blackstone was their commitment to trusting our vision and helping us get properly resourced,” Whitney Wolfe Herd, Bumble’s founder and CEO, said in promotional material on the private equity firm’s website. If I could read that quote back to someone in 2007, I’m not sure if they’d be more confused by my face mask or the words themselves.
SPACs — or special purpose acquisition vehicles — are giving buyout funds added competition for assets, but they’re also providing an alternate exit route. That may partly explain the sudden private equity frenzy this year. Selling to a SPAC is quicker than an initial public offering, and at the very least a SPAC bidder might drive up the sale price of a business that private equity is looking to flip.
The pandemic and remote work haven’t been welcome for funds that bet on office real estate and brick-and-mortar retail. At the same time, the broader private equity industry has adapted to less face time, and McKinsey notes that more buyouts closed in the fourth quarter of 2020 than in the same period of 2019.
Bloomberg
