There are no deals — the market is shut. As II has previously reported, private equity firms are stuck with assets they can’t offload, with one estimate valuing locked-up equity at $3.6 trillion.
But that's in aggregate. There are plenty of firms that have missed the memo — or at least decided not to read it. After all, the best investors have always proved their worth by what they do during a downturn.
II spoke with Collin Roche, Co-CEO of GTCR, about closing deals in a stalled market. Roche says GTCR’s focus on operational and strategic changes to increase the value of their companies gives the firm a cushion. Then “you don’t need to rely as much on market conditions for multiple expansion to drive returns.”
The Chicago-based buyout firm has completed multiple deals in recent months, including successful exits from Worldpay and Itel, and the $1.3 billion sale of Antylia Scientific to Brookfield Asset Management and CDPQ. GTCR also recently invested in U.K. insurance broker JMG, partnering with existing owner Synova.
Roche added that when things “get a little crazy” in the industry — whether prices soar or debt becomes too easily available — the firm exercises caution so it doesn't overpay for even the best businesses. Conversely, when valuations drop and fear and uncertainty rise, Roche continued, it’s often a good time to do deals. So they do invest — and they do sell — just not “at the extremes.”
During turbulent periods when companies are revalued, timing remains critical to realizing the value created during the holding period, he said.
Still, waiting for the perfect time to sell may be unrealistic: “Private equity has been taught to hold and wait for a really great exit environment. But at some point, that runs out. People have clearly been holding for several years now, waiting for another nice upturn — but it just hasn’t materialized.”
The U.S. government’s economic policies have not helped the markets as investors initially expected. Instead, they've been harmful and will ensure that rates stay high. “Without that sense of optimism, you're not going to see that dramatic upswing in markets and valuations,” he added.
Still, unlike many private equity funds, GTCR has been able to return $5 billion to cash-strapped investors. Roche expects more opportunities to emerge in the second half of the year, in addition to the add-ons and exits the firm is already pursuing, as the growing backlog of unsold assets becomes unsustainable.
According to sources, the firms that are succeeding in today’s climate are likely more realistic than their peers. Sean McKee, global head of asset management audit at KPMG, said these firms likely have a better grasp of valuations and the risks of the environment they’re selling into.
“They may have been a little bit more rigorous on the purchase price, so they have more room to give on the sales price,” McKee said. “They are also becoming more realistic about market multiples and realizing there are still good returns to be made. Some may have thought they had a home run, but instead need to take a double or a single.”
There are no guarantees the environment will improve — or even hold steady. The longer today’s conditions persist, the more likely it is that other managers will accept market reality and exit at valuations that, while short of ideal, remain solid.
