Carve-out deal value tripled last year, according to Preqin data
40% of buyers were private equity-owned companies
Valuation differences remain the biggest barrier to completing carve-out deals
February 15, 2024 (Preqin News) – Tougher economic conditions and a slow deal-making environment helped drive carve-out transactions to a record level last year. Entering 2024, the trend is likely to continue as firms grapple with higher borrowing costs and valuations remain subdued.
A total of 147 carve-outs with $48.7bn in aggregate value were completed in 2023, according to Preqin data, a 200% increase from 49 deals with $12.1bn aggregate deal value a year earlier. The US recorded 48 deals, while 72 carve-outs were completed in Europe.
Activity has been building since 2022, when accelerating inflation and subsequent increases in interest rates increased the cost of running businesses. With depressed valuations hampering IPOs and other exit possibilities, carve-outs have become popular among investors and parent firms.
Of the carve-outs completed in 2023, more than 40% were sold to private equity-owned companies, according to Preqin data; rising to 61 transactions from 13 in 2022, as the buyers pursue growth via the buy and build strategy.
Analysts expect the number of transactions to remain high in 2024 as more firms explore options to generate cash from struggling or non-core operations. Meanwhile, investors remain vigilant to the potential value creation opportunities that carve-outs may offer, particularly given the backdrop of muted deal-making activity elsewhere.
‘Rising costs coupled with lackluster earnings continue to force corporates – both public and private – to reconsider the strategic fit of their portfolios. For private equity, this landscape offers continued opportunity,’ professional services firm PwC said in its Private equity: US Deals 2024 Outlook.
Given firms’ priorities, the expense and resources required to meet transformations in certain sectors – not least increased environmental and sustainability standards and reporting – are expected to help drive carve-out activity. Additional drivers stem from issues including energy costs as well as regulatory and policy schedules.
According to law firm Norton Rose Fulbright, private equity firms may increasingly benefit from the continued transformation of many sectors in Europe, including automotive, banking, chemical, energy, and manufacturing.
‘Such transformation processes by corporate entities very often entail the divestiture of assets deemed not core to the corporate’s business strategy,’ the firm said. Two-thirds of large European corporates surveyed by the law firm expected a significant uptick in carve-out activity in the next 12 months.
In its Outlook for 2024, KKR said many listed companies were hit by investors’ belief that ‘the S&P 500 is trading at lofty headline valuations and the US economy is topping out and headed for a hard landing.’ It said there are carve-out opportunities among the S&P 500 today that were not available four to seven years ago, as companies with compelling growth plans seek other sources of capital to grow or reposition their business.
Contrasting views over valuations between potential buyers and sellers hampered deal-making throughout 2023 and, entering 2024, differing stances on values remain a potential roadblock to activity. According to a Deloitte Q4 survey, 71% of North American Chief Financial Officers said that valuation of assets and widening spreads between bids were the biggest challenges to deal success.
For firms wishing to free up capital or deleverage, but mindful that the current valuation environment risked selling at the bottom of the market, spin-offs were used in 2023 by some public companies looking to dispose of non-core business segments, according to law firm Skadden, a strategy that they said is likely to persist throughout this year.
‘In some cases, we have seen corporate sellers pursue a “dual track” carve-out/spin-off process, having a spin-off as a backup option in case a carve-out sale process did not achieve the desired result. We expect to continue to see more of these types of transactions in 2024,’ the firm said.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.