In today’s world, there is much uncertainty around public markets. However, for private equity investors, this uncertainty represents a unique opportunity to take advantage of investment opportunities in public markets. A “take-private” transaction in the context of private equity is a process by which a PE firm acquires a publicly listed company and converts it into a privately held entity. The shares of the company are bought out and delisted from the public stock exchange that the company trades on.
In 2023, take-private transactions have become very popular amongst PE firms. According to the Institutional Investor, 81% of value in all transactions in 2023 so far were take-private deals (compared to 20% seen in a typical year). Even in 2022, when take-private deals hit a new record, they only accounted for 37% of the total value of transactions. Clearly, there is a high level of interest in this space for private investors and it is an important transaction type to be aware of for any investor.
What does a take-private entail?
First, private equity identifies the publicly traded company they believe is undervalued or could perform better as a private entity without the pressures of being a public entity (e.g. the company is under scrutiny by public investors causing a severe drop in value, needs a drastic change in the management team in order to improve operations, etc.). The PE firm will then approach the company and make an offer to take them private; this is usually done through an intermediary such as a banker or, if the PE investors are familiar with the Board Members of the company, this approach can be taken more directly.
Once the terms are agreed upon, the acquisition is financed through a combination of debt and equity from the PE firm, as with a typical transaction. This results in the target company receiving a potentially very different capital structure than they previously had, typically with higher debt levels.
After the acquisition, the previously public company is delisted from its stock exchange, whether the NYSE, NASDAQ, etc. The stock stops trading once this is complete, so if you were to look up a company that was taken private, you would only be able to find historical trading history up until the date it was taken private. After that, you can look to sources with private company information to understand how the company has performed under private ownership (e.g. Pitchbook).
Under PE ownership, the company will undergo significant operational changes to increase its value. After a certain period of time, usually 5-7 years, the PE firm will look to exit the investment. Like a typical leveraged buyout, this can be achieved by selling the company to another private entity, or another PE firm, or taking the company public once again through an IPO.
Why are take-private transactions attractive?
There are a few reasons why take-private transactions are and remain attractive for PE investors, both in the current economic environment and more generally.
First, one of the primary reasons PE investors like take-private transactions is because they allow near-complete control and influence over the investment. Many PE firms like to make majority or controlling investments because it allows them to make swift decisions and control the direction of the company’s growth. In a take-private, PE firms will typically buy out the majority if not all of the public float, leaving only a small fraction of the company to existing management or other smaller key stakeholders. With this control, PE investors can drive operational improvements, financial restructuring, or other strategic shifts that will increase the value of the investment at exit.
Another key reason is the potential ability to achieve higher returns than public investors. Since private equity investments generally carry more risk than investing in the public markets, PE must command a higher level of return for investors to remain comfortable with the level of risk they are taking. When a private equity firm acquires a public company, they have conviction that they can achieve higher returns under private ownership than investors are receiving from directly investing in that company’s public stock. PE firms achieve this through the operational improvements we’ve mentioned above.
More specifically, private equity investors in 2023 have noticed the decline in the value of public market companies. According to S&P Global, the S&P fell 18.11% in 2022 amid surging inflation, rising interest rates, and an overall uncertain global outlook. Buying companies “on the cheap” is a key value driver for PE investors; one of the key items private investors think about to achieve better returns is how little we can pay to achieve the highest return. Therefore, buying these companies at a relative discount compared to prior years has fueled the frenzy around take-private transactions.
Lastly, since private equity firms use large amounts of debt to finance transactions, investors are highly sensitive to rising interest rates since higher interest payments can hurt the value of the company and greatly decrease the cash flow available to fund growth. Many public companies have what are called “legacy sponsors” where this party already has a financing agreement in place with the target of the take-private deal. Thus, if private equity firms acquire the company and keep the existing debt in place, they can likely avoid the huge interest rate increases that have occurred in 2022 and 2023. They can also achieve more attractive yields given that they have minimized interest payments and have more cash flow to work with for the investment.
What will the landscape look like going forward?
Clearly, going private can be advantageous for both public companies and the PE investors that acquire them. As a private entity, a company can focus on transforming the business without the burden of public company reporting. In addition, private companies can undergo major restructuring without having to explain the rationale to public investors who may not understand the trajectory of the business. Overall, it would not be surprising to see PE investors continue to take advantage of the favorable public market situation until the next bull market occurs, which would then raise the value of public companies and make take-private transactions a less lucrative option for private investors.
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