(Bloomberg) -- Private equity firms are back to spending big in their hunt for public US companies.
They have struck almost $85 billion in deals this year involving listed US targets, according to data compiled by Bloomberg that cover transactions valued at $1 billion or more. That’s up by roughly half on the same point in 2023 and the second-highest year-to-date tally since 2010, the data show.
The dealmaking is being driven by trillions of dollars of unspent capital sitting in private equity funds, as well as by Wall Street’s renewed appetite for financing leveraged buyouts. These factors, together with a booming private credit market, are providing buyout firms with ample funds to pursue deals.
“At the moment we are seeing market conditions that are conducive to take-private transactions, including valuation expectation alignment, an accommodating interest rate environment and reduced equity market volatility,” said Anthony Vernace, a partner in Simpson Thacher & Bartlett LLP’s corporate practice.
The end of the US Federal Reserve’s rate-hiking cycle has also helped ease negotiations between private equity firms and sellers over deal valuations — even as US stock markets have continued their hot streak in 2024.
“Although the broader equity markets continue to trade at record highs, companies that have been left behind are on private equity radar screens,” said Brian Link, co-head of North America mergers and acquisitions at Citigroup Inc. “If you look at precedent deals, the vast majority of public buyouts are triggered by an approach from a sponsor.”
The spending is a boost to the broader M&A market as it continues to recover from two down years. Much of the slump had been attributed to the reluctance of private equity firms to buy and sell, as higher interest rates increased financing costs and skewed valuations. But a need to put a mountain of unspent money has seen them return from the sidelines.
“Private equity sponsors are actively looking to deploy more capital as they sit on record dry powder,” said Link. “With the backdrop of tempering inflation and falling interest rates, we do see the pressure to deploy capital driving an accelerating level of sponsor acquisitions going into 2025.”
Software Sizzles
Private equity firms had grown more comfortable with the cost of borrowing even before the Fed lowered its benchmark rate for the first time in more than four years in September.
A particularly busy summer brought KKR & Co.’s agreement to buy educational software provider Instructure Holdings Inc. for about $4.8 billion including debt, and TowerBrook Capital Partners and Clayton, Dubilier & Rice’s $8.9 billion take-private of R1 RCM Inc., a company that helps hospitals optimize their billing and other payment functions.
The dealmaking has continued at a steady pace since the rate cut, thanks in large part to private equity’s desire for software companies with large customer bases and predictable revenue streams.
In recent weeks, Blackstone Inc. and Vista Equity Partners have agreed to buy software provider Smartsheet Inc. for about $8.4 billion, and Silver Lake Management and Singapore’s GIC Pte struck a $1.7 billion deal to acquire Zuora Inc., which makes tools for companies to manage subscription-based billing. These all added to a flurry of technology and tech-adjacent take privates earlier in the year.
“Software companies are particularly attractive to private equity buyers because of the compounding effect of their resilient and predictable growth, paired with their ability to generate high recurring free cash flow,” said Kim Posnett, global head of the technology, media and telecommunications group at Goldman Sachs Group Inc. “As a result, sponsors have been involved in the vast majority of software M&A this year, and we expect that trend to continue.”
--With assistance from Dinesh Nair.
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