May 26, 2023
New LBO Playbook Emerges at Goldman Leveraged Finance Conference
(Bloomberg) -- The halcyon days of mega deals are over — at least for now — and a new playbook for leveraged buyouts is emerging, according to the chatter at an annual industry event hosted by Goldman Sachs Group Inc.
Bigger equity checks, lower leverage and a preference for higher-quality deals will be a dominant theme through the end of the year, according to bankers, private equity sponsors and investors who gathered in Rancho Palos Verdes, California earlier this week.
That’s barring any dramatic shift in policy from Federal Reserve officials, whose interest-rate hikes have fueled tighter credit conditions and a pickup in macro volatility, leading to a plunge in the kind of transactions that have dominated the industry over the past decade.
“That is certainly making deals a lot more difficult,” said Avinash Mehrotra, co-head of Americas M&A and global head of activism defense at Goldman Sachs. “That doesn’t mean private equity is dead, but a different type of deal makes sense now.”
More aggressive scrutiny from regulators has also thrown cold water on the business of leveraged buyouts. Tegna Inc. on May 22 terminated its proposed acquisition by hedge fund Standard General LP after hitting regulatory hurdles, just as attendees were making their way to the conference.
“The FTC is a well-placed scarecrow and it’s had a chilling effect,” Tim Ingrassia, Goldman Sachs’s co-chair of global M&A, said the next morning on stage. “The scarecrow has been mauling the crows with a baseball bat.”
The “market since January 2022 in total is down approximately 35% versus its run rate in 2021,” he noted.
And while private equity will continue to be an important part of the deal-making landscape, their share of transactions is likely to slide to about 20% to 25%, from almost 40% in 2021, Mehrotra said.
Still, investors aren’t likely to completely shift their allocations out of alternative assets, and private equity will continue to have dry powder to deploy. On May 23 buyout firm GTCR said it closed an $11.5 billion fund, after initially seeking to raise $9.25 billion.
As the market reorientation continues, new buyout targets are emerging, according to Christina Minnis, co-head of global credit finance and head of global acquisition finance at Goldman Sachs.
Whereas tech and health-care companies dominated large leveraged buyouts over the past decade, now “M&A has been more active among natural resources and industrial firms,” she said. “They tend to be less levered and less growth-based, so it’s easier to agree on valuations.”
More companies have begun exploring buyouts with advisers, which could bring a pickup in activity by the end of the year, she added. Nonetheless, large deals and those for lower-rated companies remain difficult.
Vivek Bantwal, co-head of the global financing group within Goldman Sachs’s investment-banking division, expects private credit to play a more limited role in funding buyouts this year as conditions in the broadly syndicated debt markets improve.
“That said, there are still important use cases for private credit,” he said. “For example it is still the best option for growth companies looking for payment-in-kind flexibility or annual recurring revenue loans.”
Over 80 bank clients and more than 400 investors attended the Goldman Sachs Leveraged Finance and Credit Conference this year, Minnis said.
--With assistance from Sonali Basak.
(Updates with comments about private credit in 13th and 14th paragraphs)
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