Private equity firms are offering the highest premiums for listed companies in more than two decades, paying almost 70 per cent above the prior share price in some cases, in a sign of the widening gap between cash-rich buyout groups and public market investors.
Buyout groups paid an average premium of 45 per cent for European companies in 2021, the highest since the data company Refinitiv’s records began in 1980. In the US, the premiums hit 42 per cent this year, the highest since 1999.
UK-listed companies were taken private at an average premium of 47 per cent this year.
Recent large bids have far outstripped even those levels, with US private equity firm Clayton, Dubilier & Rice offering a 61 per cent premium for the UK supermarket chain Wm Morrison and Sweden’s EQT bidding at a 69 per cent premium for the German pet supplies company Zooplus.
“Right now we’re in a period where there’s tremendous competition in the [private equity] industry,” said Brenda Rainey, managing director of Bain & Co’s private equity practice. “There’s over $1tn of dry powder in buyouts alone that’s looking to do deals. We will absolutely see prices go up when competition is that stiff.”
By contrast, fund managers investing in stocks sometimes have limited firepower to buy more shares even in companies they think are undervalued, particularly in the UK and Europe, said James Henderson, a portfolio manager at Janus Henderson.
“Across Europe there’s a lack of flows into equity markets,” he said. “It’s a frustration that these are still good purchases on the whole for private equity. They’re buying good businesses [and are] in a strong position because they’ve got so much money,” he said.
Buyout groups have taken advantage of depressed share prices in the wake of the pandemic and, in the UK, of the hit from Brexit. While the premiums look high compared with previous trading prices, they are in some cases lower when compared to pre-pandemic levels, one adviser to the industry said.
“Why are stocks so poorly valued?” a senior figure at a large private equity firm said. “There’s a theory that ‘these [private equity] guys are crazy to pay so much’, but the reality may be that the share price was too low,” he said, arguing some listed companies were “hugely undervalued”.
By contrast, some warn that the prices show signs of a bubble. One lawyer who has advised private equity groups on take-private deals said conditions in the industry were reminiscent of the pre-financial crisis era when buyers subsequently struggled to deliver returns on some high-priced deals.
“Everyone knows people are paying a lot of money for companies,” he said. “For the model to work, every day has to be sunny, and life isn’t like that.”
However, he added, buyout groups have more ways to exit investments than in the past — such as selling companies to themselves — which could help cushion the impact of any downturn.