PE Exits
US PE exits slow to a trickle in Q1
May 2, 2023
Sales of PE-backed companies in the US have been sluggish in 2023 as buyout firms avoid offloading their investments at lower valuations.
In Q1, US PE firms closed an estimated 279 exits, according to PitchBook's latest US PE Breakdown, a 14.4% fall from the previous quarter. These exits had an estimated combined value of $55.9 billion—the lowest quarterly figure since Q2 2020.
"We have seen close to a 20% valuation discount on M&A deals, which happened in the last three to six months," said Judd Appel, a managing director at EisnerAmper and national leader of the advisory firm's transaction advisory services practice. "Things that were trading at a 12x EBITDA before are now trading at 10x."
The easiest way to get a deal done now is to sell to strategic buyers, which can fund the purchase with a lower cost of capital, either with cash on hand or by drawing on credit facilities issued before the recent interest rate hikes, Appel said.
These acquirers are often willing to pay more for targets than financial buyers, as they focus on improving their business through the acquisition, he noted.
Trade sales, in which a PE firm offloads its investment to a corporate buyer, continued to be the dominant exit path in Q1, accounting for nearly 53.8% of all US PE exits—the highest proportion since Q3 2020, PitchBook data shows.
The other two categories—public listings and sales to other PE firms—lulled as cheap debt financing dwindled and the IPO market froze over. Only four companies backed by US PE firms priced IPOs in the first three months of the year, according to PitchBook data.
Higher borrowing costs, a result of interest rate hikes and wider spreads, has curbed buyout firms' enthusiasm for large acquisitions. Many chose to hold on to their portfolio companies and make operational improvements rather than buying a platform.
In March, Marlboro maker Altria Group agreed to buy Njoy for roughly $2.75 billion, allowing the e-cigarette company's backers—ArmaVir Partners, 44 Capital Investments and a number of other investment firms—to reap a reward. The transaction is one of the largest exits announced so far this year for US PE firms.
PE investment managers have had to pare down distributions to LPs in response to the decline in exits, which has prompted more LPs to pursue secondary transactions to free up liquidity for capital calls or make commitments to new funds. PE firms are also increasingly turning to the secondary market to unlock liquidity for their investors.
"This has created a trickle-down effect," said Karsten Beveridge, an analyst at investment bank Setter Capital who focuses on PE secondaries. "The exit market dries up and distributions to LPs dry up, but LPs still need to cover their capital calls. This has created an interesting dynamic where GPs are left in a situation to look at different avenues to generate liquidity for their LPs."
Featured image by Tim Roberts Photography/Shutterstock
In Q1, US PE firms closed an estimated 279 exits, according to PitchBook's latest US PE Breakdown, a 14.4% fall from the previous quarter. These exits had an estimated combined value of $55.9 billion—the lowest quarterly figure since Q2 2020.
"We have seen close to a 20% valuation discount on M&A deals, which happened in the last three to six months," said Judd Appel, a managing director at EisnerAmper and national leader of the advisory firm's transaction advisory services practice. "Things that were trading at a 12x EBITDA before are now trading at 10x."
The easiest way to get a deal done now is to sell to strategic buyers, which can fund the purchase with a lower cost of capital, either with cash on hand or by drawing on credit facilities issued before the recent interest rate hikes, Appel said.
These acquirers are often willing to pay more for targets than financial buyers, as they focus on improving their business through the acquisition, he noted.
Trade sales, in which a PE firm offloads its investment to a corporate buyer, continued to be the dominant exit path in Q1, accounting for nearly 53.8% of all US PE exits—the highest proportion since Q3 2020, PitchBook data shows.
The other two categories—public listings and sales to other PE firms—lulled as cheap debt financing dwindled and the IPO market froze over. Only four companies backed by US PE firms priced IPOs in the first three months of the year, according to PitchBook data.
Higher borrowing costs, a result of interest rate hikes and wider spreads, has curbed buyout firms' enthusiasm for large acquisitions. Many chose to hold on to their portfolio companies and make operational improvements rather than buying a platform.
In March, Marlboro maker Altria Group agreed to buy Njoy for roughly $2.75 billion, allowing the e-cigarette company's backers—ArmaVir Partners, 44 Capital Investments and a number of other investment firms—to reap a reward. The transaction is one of the largest exits announced so far this year for US PE firms.
PE investment managers have had to pare down distributions to LPs in response to the decline in exits, which has prompted more LPs to pursue secondary transactions to free up liquidity for capital calls or make commitments to new funds. PE firms are also increasingly turning to the secondary market to unlock liquidity for their investors.
"This has created a trickle-down effect," said Karsten Beveridge, an analyst at investment bank Setter Capital who focuses on PE secondaries. "The exit market dries up and distributions to LPs dry up, but LPs still need to cover their capital calls. This has created an interesting dynamic where GPs are left in a situation to look at different avenues to generate liquidity for their LPs."
Read more: Q1 2023 US PE Breakdown
Featured image by Tim Roberts Photography/Shutterstock
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