‘Ten years ago, PE didn’t do take-privates that often; what’s changed over the last five years in particular is that they are now completely accepted as buyers of public businesses. All the regulatory authorities get it, the banks understand it, so there’s no limit on the deals.’ So comments David Higgins, Kirkland & Ellis private equity (PE) heavyweight on the ever-increasing influence buyout houses now have on the public markets.
Of course, public-to-privates are nothing new but the volume and profile of deals and the breadth of sectors they are investing across is continuing to rise to new heights. Inevitably, as it does so, many firms are responding by reshaping their corporate practices – not to mention the way they do deals.
By any metric 2021 was a busy year for M&A and everyone advising on transactions. According to data from Refinitiv, global M&A activity soared 64% to a new high of $5.9trn across more than 63,000 transactions, with this tally including nearly 200 mega deals worth more than $5bn apiece. But even against this impressive benchmark, PE out-performed the market, accounting for a record $1.2trn of these matters. This equates to some 20% of deals by value; more than double the previous year’s total value.
As Skadden private equity head Richard Youle puts it: ‘2021 was the busiest M&A year and the busiest PE year ever. You had the continuing maturing of PE, the continued cycle of growth, with bigger funds and bigger deal sizes, diversification in asset classes and product classes and it all coincided into the most tonto year ever.’
Little wonder then that demand for lawyers to work on these deals soared last year, leading some firms to broaden the recruitment net, snapping up talented associates from as far afield as Australia. It also prompted a rethink of associate bonuses across some of the Magic Circle in a bid to keep their lawyers away from the lure of higher paying US rivals. Freshfields even went as far as introducing a special bonus just for those in the PE team.
But, under the shadow of the ongoing war in Ukraine, soaring energy prices and wider geopolitical uncertainty, what’s the outlook looking like for the rest of 2022?
A market transformed
Ask any M&A or PE partner to comment on the last year and you will largely get the same response. ‘Phenomenal’, ‘insane’, ‘incredible’ are just a few of the superlatives used by the partners canvassed for this feature.
Highlight transactions include the $34bn acquisition of US healthcare company Medline by a consortium led by Carlyle, which was the biggest PE deal of the year globally. Meanwhile, key European transactions included Clayton, Dubilier & Rice (CD&R)’s £7bn acquisition of supermarket chain Wm Morrison – one of the biggest UK PE buyouts since Boots. The deal generated roles for firms including Clifford Chance (CC) for CD&R (which has just hired the Magic Circle firm’s former partner, Simon Tinkler), while Slaughter and May acted for unsuccessful bidder Fortress and Oppidum. Other high-profile mandates include Kirkland’s role acting for Advent owned Cobham on its bid for UK defence firm Ultra Electronics, which has been the focus of government scrutiny, while Kirkland, Slaughters, Cleary and Linklaters acted on the take-private of Signature Aviation by a consortium including Blackstone, Cascade and Global Infrastructure Partners (GIP).
Slaughters’ role in the competitive auction for Morrisons is indicative of the efforts firms more traditionally associated with corporate clients are making to capture a share of the lucrative, but competitive, sponsor market. Under the leadership of Harry Bacon and Filippo de Falco the firm is making a concerted push to build up its PE credentials.
As the plethora of high-profile partner moves testifies, it is a strategy that countless firms have been chasing for years, whether you look at Allen & Overy (A&O), which has made up 30 PE partners globally since hiring PE head Stephen Lloyd eight years ago, or the increasing dominance of US firms like Kirkland, Latham & Watkins and Simpson Thacher on this side of the Atlantic. While it is true that the majority of the biggest buyout houses currently rely on a small number of firms for their biggest work, choosing not to compete in such an important and lucrative section of the market is not an option.
‘Ten years ago, PE didn’t do take-privates that often; what’s changed over the last five years in particular is that they are now completely accepted as buyers of public businesses.’
David Higgins, Kirkland & Ellis
As A&O corporate co-head David Broadley comments: ‘Public-to-privates have, in the past, come and gone but the idea that this would ever end is a myth. They’re also investing across sectors – there isn’t anything that’s a bar to them being involved in the public side across any industry. It’s a critical component of the market and our practice. In the last three years, private capital revenue for our London corporate practice has risen by over 40% and now accounts for around 35% of London corporate work.’
Melissa Fogarty, co-head of London corporate at CC, adds: ‘P2P work – like Morrisons – is a core part of what we’re doing in mainstream M&A. It chimes with our overall growth strategy. In the past we have perhaps been too cautious in our growth [in corporate] but we’re now very open to investing, as Neil Evans’ hire [from Mayer Brown] and our partner promotions show.’
The reality is that PE’s position as prospective buyers/sellers is now so well established that there is arguably a greater chance a PE house will be involved in a transaction in some capacity than that it won’t. And, even if a firm is acting for the corporate and not the buyout house, they still need to understand the different dynamics PE brings to a deal, which go far beyond the adoption of traditionally PE deal mechanics like warranty and indemnity insurance and locked box account models.
As Latham’s global M&A co-chair Ed Barnett comments: ‘PE is, of course, very active and that impacts in a positive and negative way on corporates. If you’re buying then you’re competing with PE for an asset and they do more deals and potentially may have more cash available and can often move faster with less conditionality. And if you’re selling, then you need to think about how putting together a deal package for PE would be different to a corporate – they may not have any infrastructure, you may have to put together a management team.
‘PE buyers are now mainstream in the UK and European deal landscape; they’re part of the mix on almost every deal and have professionalised deal-making.’
Global PE vice chair Kem Ihenacho continues: ‘Running a business under PE ownership may be attractive to a management team who will typically be incentivised through equity ownership which aligns their interests with those of the PE sponsor. This can be an attractive proposition compared to the acquisition of their business by a large corporate where they might be absorbed into a larger entity.’
What slowdown?
But what impact is the situation with Russia and Ukraine having?
General M&A figures for Q1 2022 demonstrate a clear pause for thought, with global deal values down more than a fifth on the same period last year to $1trn according to Refinitiv, with volume and value declining month by month.
But even though the volume of PE-backed deals dropped from January to March this year, the value continued to rise, despite the macro geopolitical uncertainty.
‘I do not think Ukraine will be a major obstacle in terms of deal activity this year,’ says Higgins. ‘Nothing we have seen has fallen over directly as a result of Ukraine. Wider macro issues are likely to be more relevant.’
Weil PE veteran Marco Compagnoni agrees, adding: ‘Take-private and IPO activity have juddered a bit recently because of market volatility associated with a number of issues, including Ukraine. The issue isn’t so much the war, as its impact on energy and other prices, and how that will impact businesses. Growth equity investing and mid-market deals have carried on though – they’ve just got so much capital to deploy.’
Put simply, PE houses have too much money that they need to invest in order to satisfy investors. Deal activity can’t really stop completely.
That’s not to say that the uncertainty isn’t having any impact though. For starters, there are likely to be increasing questions around the valuations of companies and deals.
As Skadden partner Lorenzo Corte says: ‘The big question is around valuations, given the uncertainty in the markets. How do you value the company you’re buying if you don’t know what their costs will look like in the next few months, let alone the next couple of years, or where the business has exposure to Russia and/or the Ukraine?’
‘P2P work is a core part of what we’re doing in mainstream M&A. It chimes with our overall growth strategy.’
Melissa Fogarty, Clifford Chance
Nicky Rumsby at Linklaters says: ‘The awful events in Ukraine have again led to people trying to work out what a major world event means for their business. Some are trying to work out what parts of their business they need to exit, for others it is more about seeing to what extent this will impact their share price. It will be interesting to see if we see a return to a gap in valuations between bidders and targets and whether we will see more deals going to competitive auctions as shareholders get more vocal about trying to get a better price.’
Bank lending is also becoming more expensive, meaning that, in addition to having to be more flexible on financing arrangements and perhaps using alternative credit providers, for larger deals there may be more consortium bids.
Clifford Chance’s global PE head Jonny Myers says: ‘Bank lending terms are more expensive, the price of debt is going up and on the PE side it means [general partner] clients are more focused on co-investor performance. They’re also worried about consequences if the sanctions bell is hit, with sanction risk often hard to detect.’
So far partners and firms are not overly concerned though, despite the macro-economic instability – as evidenced by the continuing drip of lateral moves. Recent examples in London include Ropes’ hire of a PE trio from Fried Frank and Freshfields’ recruitment of Rebecca Ward from Dickson Minto earlier this year.
Jonathan Wood at Weil comments: ‘There’ll be a period of mismatched buyer and seller expectations due to the market uncertainty and the impact on energy costs. People will have to be more cautious when they price deals and sellers will need to be more realistic. But balancing this against the availability of capital and the need to invest, we expect to see steady – albeit more cautious – deal flow this year.’
Ihenacho adds: ‘If you look across the industry there is still a huge amount of dry powder available to deploy and debt is available, albeit we are starting to see a hardening in the debt market.’
georgina.stanley@legalease.co.uk
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The PE trends
Looking at the private equity (PE) market beyond its interface with the public markets, partners highlight one key trend in particular that they expect to continue: the rise of longer-term holds in investments.
PE houses are increasingly moving away from the traditional play of buying an asset, stripping it and making a quick exit. Instead, with such huge amounts of capital to deploy, they are holding onto them for longer, flipping them via fund-to-fund deals or reinvesting.
As Allen & Overy’s private equity co-head Stephen Lloyd comments: ‘The number one change is that sellers are increasingly rolling over between 10% and 35% of an investment as they sell. No one is selling 100%. This is either through a continuation fund or their next fund – it means the PE house keeps the fees in-house, recycles the asset and holds it for longer.’
Examples of such deals include the 2019 Blackstone deal for Merlin, where some shareholders became joint bidders with Blackstone for the entertainment chain, a deal on which Kirkland advised.
Stuart Boyd at Kirkland comments: ‘We have seen a number of deals where the sponsors rolled their stake into the new structure, because they have real vindication on the asset and want to stay invested. Likewise, we have seen a number of fund-to-fund transfers. Ultimately, it’s about PE houses keeping their clients happy by offering LPs structures to maximise their returns, including co-invest structures where the LPs can deploy their capital alongside the [general partners].’
The trend is explained by the growing maturity of the PE market as well as the volume of capital they have available. If they were to sell a stake in a business that’s performing well year-on-year then they would have to find somewhere else to invest. But also, they are simply more comfortable taking a longer-term strategic approach to deals than they were in the past. Hence the growing number of platform deals, which see PE houses driving consolidation in a sector by carrying out multiple smaller deals in order to build a bigger platform.
Alex Woodward at Linklaters comments: ‘Three years ago it was full exit or nothing – you were more limited. But now there’s more appetite for larger deals, longer holds, more liquidity, so notwithstanding macro conditions suppressing activity I think you’ll still see more and bigger deals happening.’
The ESG element is also playing an increasingly important role in transactions. This includes the more general trend for investors to seek clarity on a potential target’s ESG credentials before going ahead with a deal, as well as more specific action that may have been required around Russia and potential sanctions.
As Youle concludes: ‘We’ve spent a lot of time with sponsor clients looking at their portfolio companies, trying to anticipate what the counter-sanctions could be for example. Areas like ESG, sanctions and compliance would normally be at the back end of the deal but now they’re at the fore.’
European private equity league tables by value
| Ranking 2021 | Ranking 2020 | Firm | 2021 Value ($USbn) | Deal Count | % Value change |
|---|---|---|---|---|---|
| 1 | 1 | Kirkland & Ellis | 92.7 | 56 | 72% |
| 2 | 10 | Clifford Chance | 85.8 | 49 | 468% |
| 3 | 11 | Weil | 78.9 | 61 | 443% |
| 4 | 3 | Latham & Watkins | 67.7 | 95 | 156% |
| 5 | 15 | Freshfields | 58 | 57 | 408% |
| 6 | 4 | Simpson Thacher | 44.2 | 16 | 119% |
| 7 | 9 | Linklaters | 40.8 | 43 | 150% |
| 8 | 189 | Gianni | 40.1 | 6 | 91,018% |
| 9 | 31 | Davis Polk | 32.8 | 3 | 570% |
| 10 | 17 | White & Case | 25.1 | 70 | 131% |
Source: Mergermarket (based on advisers to bidder)
European private equity tables by deal count
| Ranking 2021 | Ranking 2020 | Firm | Deal Value ($USbn) | Deal Count | 2020 Deal Count |
|---|---|---|---|---|---|
| 1 | 2 | Latham & Watkins | 67.7 | 95 | 47 |
| 2 | 1 | DLA Piper | 8.5 | 94 | 52 |
| 3 | 3 | White & Case | 25.1 | 70 | 44 |
| 4 | 10 | Weil | 78.9 | 61 | 26 |
| 5 | 11 | Freshfields | 58 | 57 | 26 |
| 6 | 8 | Goodwin | 3.9 | 57 | 28 |
| 7 | 4 | Kirkland & Ellis | 92.7 | 56 | 39 |
| 8 | 18 | Orrick | 18.2 | 50 | 18 |
| 9 | 9 | Hogan Lovells | 5.2 | 50 | 27 |
| 10 | 7 | Clifford Chance | 85.8 | 49 | 28 |
Source: Mergermarket