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Kasim Dmitriev
Kasim Dmitriev

Private Equity: Transforming Public Stock Into ... [2021]


Finally, the relatively rapid turnover of businesses required by the limited life of a fund means that private equity firms gain know-how fast. Permira, one of the largest and most successful European private equity funds, made more than 30 substantial acquisitions and more than 20 disposals of independent businesses from 2001 to 2006. Few public companies develop this depth of experience in buying, transforming, and selling.




Private Equity: Transforming Public Stock Into ...



As private equity has gone from strength to strength, public companies have shifted their attention away from value-creation acquisitions of the sort private equity makes. They have concentrated instead on synergistic acquisitions. Conglomerates that buy unrelated businesses with potential for significant performance improvement, as ITT and Hanson did, have fallen out of fashion. As a result, private equity firms have faced few rivals for acquisitions in their sweet spot. Given the success of private equity, it is time for public companies to consider whether they might compete more directly in this space.


With the removal of the tax disincentives across Europe, a few new publicly quoted buyout players have emerged. The largest are two French companies, Wendel and Eurazeo. Both have achieved strong returns on their buyout investments. Eurazeo, for example, has achieved an average internal rate of return of 53% on Terreal, Eutelsat, and Fraikin, its three large buyout exits over the past five years. (In the United States, where private companies can elect, like private partnerships, not to be subject to corporate tax, Platinum Equity has become one of the fastest-growing private companies in the country by competing to buy out subsidiaries of public companies.)


GE would of course have to pay corporate capital gains taxes on frequent business disposals. We would argue that the tax constraints that discriminate against U.S. public companies in favor of private equity funds and private companies should be eliminated. Nevertheless, even in the current U.S. tax environment, there are ways for public companies to lighten this burden. For example, spinoffs, in which the owners of the parent company receive equity stakes in a newly independent entity, are not subject to the same constraints; after a spinoff, individual shareholders can sell stock in the new enterprise with no corporate capital gains tax payable.


Can you spot and correctly value businesses with improvement opportunities? For every deal a private equity firm closes, it may proactively screen dozens of potential targets. Many firms devote more capacity to this than to anything else. Private equity managers come from investment banking or strategy consulting, and often have line business experience as well. They use their extensive networks of business and financial connections, including potential bidding partners, to find new deals. Their skill at predicting cash flows makes it possible for them to work with high leverage but acceptable risk. A public company adopting a buy-to-sell strategy in at least part of its business portfolio needs to assess its capabilities in these areas and, if they are lacking, determine whether they could be acquired or developed.


Over the course of many acquisitions, private equity firms build their experience with turnarounds and hone their techniques for improving revenues and margins. A public company needs to assess whether it has a similar track record and skills and, if so, whether key managers can be freed up to take on new transformation challenges.


Note, however, that whereas some private equity firms have operating partners who focus on business performance improvement, most do not have strength and depth in operating management. This could be a trump card for a public company adopting a buy-to-sell strategy and competing with the private equity players.


Because they maintain liquidity for their investors, hedge funds and mutual funds cannot bid to take outright control of public companies or invest in private companies. This is where private equity funds, such as those managed by KKR, which are willing to sacrifice liquidity for investors, have an edge.


RAD was created in order to give public housing authorities (PHAs) a powerful tool to preserve and improve public housing properties and address the $26 billion dollar nationwide backlog of deferred maintenance. RAD also gives owners of three HUD "legacy" program (Rent Supplement, Rental Assistance Payment, and Section 8 Moderate Rehabilitation) the opportunity to enter into long-term contracts that facilitate the financing of improvements.


The burst of liquidity has not only shored up portfolio companies wrestling with erratic demand and supply chain issues, but it has also ensured that debt to fund buyouts remains abundant and cheap. With record amounts of unspent capital waiting to be put into play, private equity investors were presented with ideal conditions to buy and sell companies. That fed a trend that has been building for years: The biggest, most experienced funds are raising the most money and doing ever bigger deals. Average deal size pierced through the $1 billion mark in 2021 for the first time ever.


The move into technology and growth is part of a pronounced shift toward specialization in the private equity industry. As mentioned earlier, LPs are increasingly looking to meet specific needs and allocations by investing across sectors and asset classes. That is spurring robust expansion in a variety of sector specializations, as well as in areas like secondaries, infrastructure, long-term funds, and venture capital.


Massive amounts of dry powder drummed up deals between sponsors. Soaring public markets led to a burst in IPO activity. Rising stock prices and better-than-expected economic growth gave corporate buyers ample currency for strategic deals. The rise in special-purpose acquisition companies (SPACs) also played a role, albeit mostly in the growth sphere. Prices were soaring, markets were hungry, and the cost of debt was near zero.


Corporations, which tend to view private equity ownership as a seal of approval, were the most voracious buyers of former portfolio companies, pumping $458 billion into the market, or double what they spent a year earlier. Sponsor-to-sponsor deals were next at $228 billion, with SPACs coming in third at $158 billion (although that number includes the full value of deals in which buyout firms owned minority shares). What made the SPAC volume stand out was the fact that it rose from just $37 billion in 2020, a 325% increase. IPOs also grew rapidly, adding $112 billion in volume, up from $67 billion in 2020, as sponsors rushed to take advantage of soaring equity markets, particularly in the US.


The rise, fall, and rise again of SPAC IPOs over the past two years has been a sight to behold. Once an arcane financing vehicle few had ever heard of, SPACs burst into the mainstream in 2020, with new issues reaching a fever pitch in early 2021. SPACs are shell companies with no operations that raise capital through an IPO and use the proceeds (alongside PIPE financing and, sometimes, debt) to fund one or more mergers, which then form the basis of an ongoing public entity. They typically are on a time clock, meaning they have to spend the money within a given time frame, a period that has been slipping in new deals from 24 months to between 12 and 18 months.


As far as returns go, private equity continued to deliver for investors in 2021. Buyout funds on average have generated stronger pooled net IRR than public markets across multiple time periods and geographies (see Figure 26). As has been the case over the past several years, the outperformance has been narrowest in the US, where the long technology-driven rally in the public averages has closed the historical gap with private equity.


After 2 years of sharp declines, exits rebounded vigorously. Total exit value for the region more than doubled, reaching $172 billion. Initial public offerings (IPOs) were still the most popular exit channel, buoyed by strong stock market performances in South Korea and Japan. In India, the value of all IPOs set a record.


Some automated solutions for carbon accounting are starting to emerge on the market. Persefoni is a market-leading software-as-a-service platform that has a dedicated solution for private equity funds and their portfolio companies. The cloud-based application enables organizations to turn financial, operational, and supply chain data into certified carbon footprint data for use in LP disclosures or transaction and offering prospectuses. Portfolio companies also can use the platform for their internal carbon accounting and ongoing carbon footprint management.


The last two decades have seen the growth and consolidation of private markets. These revolve around funds gathered from institutional investors by "alternative asset managers", typically private equity or venture capital firms that have subsequently expanded into credit. In an environment of light regulation, long investor horizons and low interest rates, the involvement of private market funds in firms' investment financing and restructuring has grown over time. The interactions of these increasingly important non-bank financial intermediaries with the wider economy and their response to monetary policy have not been fully explored. We find that, despite long investment horizons, private markets are as procyclical as public markets. As for monetary policy, its transmission differs according to the type of private market fund, exerting the strongest effect on private credit funds. 1


External financing is increasingly intermediated outside traditional channels. Banks and other institutions active in public capital markets, such as equity and corporate bond mutual funds, remain key financing sources for large and mature corporates. That said, "alternative asset managers" (AAMs) have become pivotal for smaller firms globally, including in emerging market economies (EMEs). Many AAMs were established as private equity firms that later expanded into credit, thus turning themselves into one-stop capital providers for firms less able or willing to access traditional sources. 041b061a72


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