July 28, 2021 – If there were a theme to describe the merger market recently, it would be “The Return of Private Equity.”
From non-existent during the Covid pandemic when valuations were at their lowest, private equity has returned with a vengeance as U.S equity markets reach their highest valuations on record.
Over the past month, there have been four leveraged buyouts for an aggregate value of $15.2 billion. Currently, LBOs account for 21% of the deal count and 27.6% of the deal value.
Of note, private equity firm Thoma Bravo is aggressively putting capital to work, as the sponsor accounted for 75% of the past month’s buyouts.
Thoma Bravo now has five public U.S. leveraged buyouts worth $30 billion announced but not yet closed. This amount of deal activity for one private equity firm is unprecedented.
Not only is the pace of the deal activity unprecedented, but the valuations and premiums paid are as well.
Source: Accelerate, Bloomberg
Thoma Bravo’s tech-focused buyouts have featured average premiums paid of 33.8% above the unaffected market price. Valuations of these LBOs, at an average 64.4x forecast EBITDA, are at a significant premium not only to the S&P 500’s 14.0x but also to historical private equity deals that used to get done around 8.0x (now around 12.0x).
Private equity firms now dictate a material portion of the M&A market, which is important given the Biden administration’s increased stance on “trust-busting” and antitrust regulation. Increased scrutiny from the Government has already claimed its first victim, Aon’s $36 billion acquisition of Willis Towers Watson.
As the U.S antitrust regulators continue to put the screws to merger deals, deserved or not, LBOs will be an essential source of deal flow for merger arbitrageurs given the lowered antitrust risk that comes with purely financial transactions.
In addition, the private equity industry needs to spend their accumulated nearly $2.5 trillion of “dry powder” to generate revenue for their firms. This forced buyer dynamic will continue to drive leveraged buyout activity and provide a consistent source of investment opportunities for arbitrageurs looking for deals with low antitrust risk.
The below AlphaRank Merger Monitor represents Accelerate’s proprietary analytics database on all announced liquid U.S. mergers. The AlphaRank Merger Arbitrage Effective Yield represents the average annualized return of all outstanding merger arbitrage spreads and is typically viewed as an alternative to fixed income yield.
Each individual merger is assigned a risk rating:
- AA – a merger arbitrage rated ‘AA’ has the highest rating assigned by AlphaRank. The merger has the highest probability of closing.
- A – a merger arbitrage rated ‘A’ differs from the highest-rated mergers only by a small degree. The merger has a very high probability of closing.
- BBB – a merger arbitrage rated ‘BBB’ is of investment grade and has a high probability of closing.
- BB – a merger arbitrage rated ‘BB’ is somewhat speculative in nature and has a greater than 90% probability of closing.
- B – a merger arbitrage rated ‘B’ is speculative in nature and has a greater than 85% probability of closing.
- CCC – a merger arbitrage rated ‘CCC’ is very speculative in nature. The merger is subject to certain conditions that may not be satisfied.
- NR – a merger rated NR is trading either at a premium to the implied consideration or a discount to the unaffected price.
The AlphaRank merger analytics database is utilized in running the Accelerate Arbitrage Fund (TSX: ARB), which may have positions in some of the securities mentioned.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). Visit AccelerateShares.com for more information. Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.