Corporate acquirers are number one no more.
For the first time last year, deep-pocketed private equity firms grabbed a bigger share of the North American M&A market than did corporate acquirers.
All told, private equity firms acquired 6,069 companies with at least $10 million in enterprise value last year, according to data from deal-sourcing platform provider SPS by Bain & Co. That represented 53 percent of the 11,556 companies that changed hands.
Strategic investors, meantime, acquired 5,487 companies, for a slightly smaller, 47 percent share of the market.
Private equity firms have come close to parity with corporate buyers in recent years. They posted market shares of 49 percent in both 2018 and 2019 before falling just short of 50 percent in 2020.
But it’s a relatively new phenomenon. As recently as 2014 their market share was just 42 percent; in 2013 it was 41 percent.
Ron Kahn, a managing director at Chicago investment bank Lincoln International, and co-head of U.S. valuations and opinions groups, pointed to the growing war chests of financial buyers as perhaps the biggest factor behind their surge in market share.
Enchanted by high returns on past investments, institutional investors have been pouring money into buyout funds. Around the world buyout firms raised $387 billion in fresh commitments in 2021, the second highest tally on record, according to Bain & Co. That single year’s take alone equates to roughly a trillion dollars in buying power.
“Private equity firms have amassed so much capital today. They’re bigger than ever,” said Kahn. “Their ability to compete with strategics is better than ever.” Other reasons for the rise in financial buying, according to Kahn:
- Buy and Build Strategy: In the past, corporate acquirers often outbid private equity firms in auctions on the expectation of cost-savings, cross-selling opportunities and other synergies. But the enormous popularity of the buy and build strategy, in which private equity firms acquire and combine a series of companies over time, means they have the same opportunities. According to data from SPS by Bain & Co., last year financial sponsors acquired 2.3 add-on acquisitions for every standalone buyout. That was up from 1.8 in 2019 and 1.4 in 2015.
- High Valuations: Big price tags for private companies can give pause to both financial sponsors and corporate acquirers. But financial buyers, typically organized as private limited partnerships, don’t have to worry about their own share price when bidding. That’s not so for publicly traded companies. Yes, they can use their shares as currency, which can be an advantage during bull markets. But shareholders rarely look favorably on high-priced acquisitions that are dilutive to earnings per share. And that can give financial buyers an edge in auctions.
- Growing Familiarity: Thirty years ago, owners of many family-run businesses were loath to sell to financial buyers. Hollywood, for one, depicted private equity executives as soulless Wall Street barons who broke up companies for profit and fired rank-and-file workers. Think Gordon Gekko and his famous line in the 1987 movie Wall Street: “Greed, for lack of a better word, is good.” But time and experience have tempered those prejudices. Many executives today actually prefer private equity to corporate ownership. They like the idea of getting an allocation of equity in their own companies that they can cash out of in a few years—a hallmark of the private equity model.
- Creative Structures: Corporate buyers as a rule don’t have as much flexibility when it comes to deal structure. They might insist on buying 100 percent of a company, say, and moving it halfway across the country. Take it or leave it. Financial buyers, by contrast, pride themselves on negotiating creative deal structures in a bid to keep sellers happy. Does the seller want to maintain a minority stake post-transaction? Or even a majority stake? Provided they can meet their return expectations, financial buyers find a way to make it happen.
- Flexible Time Horizons: The knock on financial buyers used to be that they had short-term investment horizons of three to five years. That’s when they would be compelled to sell again or take a company public so they could return capital to their institutional backers. That can be off-putting to sellers who’d prefer a long-term, stable home for a company. Today, however, the GP-led secondary market allows financial buyers to hold companies for extended periods of time, as has the advent of long-duration funds designed for longer hold periods.