Private-Equity Giants Settle for Bite-Size Deals

So far this year, PE-backed deals have an average value of $65.9 million, the smallest for the comparable period since the global financial crisis, according to Refinitiv
So far this year, PE-backed deals have an average value of $65.9 million, the smallest for the comparable period since the global financial crisis, according to Refinitiv


  • With debt no longer cheap and abundant, Blackstone, KKR and other buyout firms look to smaller deals to build up companies they already own

Megadeals are out. Little deals are in.

Blackstone, KKR and other buyout giants are using their record war chests to snap up smaller companies in deals that typically are easier to accomplish in an era of soaring borrowing costs and economic uncertainty.

Volatile markets and a cloudy economic outlook have made it harder for buyers and sellers to agree on the worth of a business. More expensive debt and a dearth of bank financing is also making large buyouts more challenging, bankers and private-equity deal makers say.

So far this year, PE-backed deals have an average value of $65.9 million, the smallest for the comparable period since the global financial crisis, according to Refinitiv, a data provider.

Smaller takeovers and add-on deals are en vogue, industry participants say, because they often require no debt and allow firms to keep investing despite the tougher backdrop. An add-on deal is one where a PE firm or other buyer acquires a business and integrates it into a company already in its portfolio.

As of Friday, the overall value of private-equity-backed deals is down over 50% in 2023 versus the prior period, at a three-year low of about $256.7 billion, according to Refinitiv. But the number of transactions has fallen 4% to 6,458. That is the third-highest year-to-date tally in data going back more than 30 years, showing the resurgence of smaller deals.

For Blackstone, which is known for larger deals such as its $4.6 billion purchase of events-software company Cvent Holding, the shift means buying smaller companies that it can combine with those that it already owns, said Eli Nagler, a deal maker in the firm’s buyout group. The combined company can eliminate overlapping operations and boost revenue to achieve a higher valuation in a future sale or initial public offering.

Blackstone can take advantage of portfolio companies that have existing debt facilities locked in at lower rates than are currently available. By drawing down those facilities to finance a deal, Blackstone and the portfolio company can cut acquisition costs, Nagler said.

Companies backed by Blackstone that have recently struck add-on deals include K-12 education-technology provider Renaissance, advertising automation specialist, and environmental, social and governance software provider Sphera. Values weren’t available.

Ares Management, which finances deals for PE firms, has also seen this trend play out. “For financing commitments out of our U.S. direct-lending business, we saw a smaller average transaction size in the first quarter of 2023 versus the same period in 2022," said Kipp deVeer, the head of Ares’s credit group.

The high cost of debt and inflationary pressures have led BC Partners, which has headquarters in London and New York, to accelerate its strategy of add-on deals to help the companies it already owns expand and attract new customers, said Nikos Stathopoulos, the buyout firm’s European chairman.

In one example, Davies Group, which provides services to the insurance industry and is owned by BC Partners, has acquired three companies—ClaimPilot, MVP and Afirm—in 2023 to expand its U.S. operations and add to its consulting and audit offerings. Deal values ranged between €10 million (or $10.9 million) and €50 million.

PE firms have more than $1.4 trillion to spend, according to Preqin, a data provider. They need to invest to start generating returns, which in turn will help them raise new funds for future deal making and garner the fee income that comes with it.

As recently as 2021, deals such as the more than $30 billion bid for Medline Industries by Blackstone, Carlyle Group and Hellman & Friedman were viewed as signaling a revival in big leveraged buyouts. Other multibillion-dollar buyouts included the $17 billion purchase of Athenahealth and the $12 billion, excluding debt, acquisition of McAfee.

Larger acquisitions can be a more efficient way to spend money quickly. But the financing of one megadeal this year helps explain the current preference for smaller transactions. While historically, buyout firms have financed around half of an acquisition with debt to boost their returns, the $12.5 billion purchase of Qualtrics by Silver Lake and Canada Pension Plan Investment Board used $1 billion in debt and relied on equity to finance most of the acquisition.

Small deals carry their own disadvantages, though, bankers and deal makers said. They slow the investing process down and can be more hotly contested. Smaller targets can also have less financial data and less-experienced management.

“Smaller deals are just as hard, if not harder, to do than big deals," said Jeremy Swan, a managing principal in the financial-services and financial-sponsors group at advisory firm CohnReznick.

“It’s a lot more challenging and requires more diligence," Swan said, pointing to less-developed finance functions at smaller companies.

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