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Buyout firms struggling to exit due to price gaps

Disagreements over valuations have been a barrier for buyout firms attempting to exit their portfolio companies, according to a report by Bloomberg, which cites an Ares Management (Ares) executive speaking at this year’s IPEM in Cannes.

The report quotes Stephane Etroy, Head of European Private Equity at Ares, who spoke on a panel at the IPEM conference in Cannes this Wednesday.

According to Etroy, high-quality companies — which offer defensive characteristics or high growth — are getting sold at the same valuations as pre-Covid. There are deals for struggling companies that urgently need capital, but there are fewer transactions targeting companies in the middle of those two extremes.

He said: “There’s a bid/ask spread, and people just wait for better days. If they can wait, why would you want to put your average company up for sale right now?”

Etroy also remarked that investors have become pickier, a situation that is leading to private equity firms undertaking more exits via continuation funds (which allow them to transfer assets to a new vehicle) or with a co-control or structured equity type of deal.

“People may have different views about interest rates, but it’s likely to be volatile and unclear for some time,” Etroy said. “That hurts cash flows, that hurts exit multiples and creates uncertainty. And so the middle gets squeezed.”

Other private equity executives have echoed Etroy’s observations and have said they will prioritise the sale of assets so they can return cash to investors. According to the Bloomberg report, buyout houses including Thoma Bravo and Permira have ranked portfolio company sales highly on their agendas for early 2024.

Michael Elio, a Partner at StepStone Group who also spoke on the panel, noted a boom in continuation funds.

Mark McDonald, Co-Head of Sponsor Solutions at Brookfield, said that buyout firms are holding assets for longer and doing more bolt-on acquisitions to increase their valuations before exiting at a later point. According to McDonald, Brookfield’s sponsor solutions business — which works on deals including GP-led secondaries transactions as well as providing capital for acquisitions — saw volumes double in 2023 and expects 2024 to be another record year.

McDonald said: “They’re looking for more creative solutions.”

If I’m not going to sell the asset this year, what can I do to generate value, increase the multiple and the IRR over the next two years?”

Elio also said he was “very optimistic” about deal flow in 2024 and noted that rates seem to have topped out for the time being, making it easier to model future returns.

He added: “Some of our investors are starting to see inflows again. There’s a lot more activity, and things are actually getting done.”

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