Riding the Take-Private Wave: An Evolving Landscape for GPs

November 06, 2023

Key Takeaways

94% of respondents are likely to pursue take-private transactions

In a major reversal from 2022, when only 13% of GPs expressed firm intentions of pursuing take-privates, they are now purposefully scouring the public markets for deals, and almost all say they are likely to consider this option.
Given the additional regulatory complexity and public scrutiny of these deals, active engagement of skilled professional advisers from the very start is a necessity, particularly in the U.S., where stockholder-plaintiffs have recently secured significant damages awards in the Delaware courts against acquirors in take-privates.

Take-privates are very much on GPs’ radar as a strategic response to current economic and market conditions. As we have seen in certain regions, take-private transactions have represented some of the largest deals. Sponsors continue to identify opportunities to acquire what they view as undervalued assets which they can then radically transform away from the burden of short-term quarterly reporting and the scrutiny of public markets. The findings of our survey show that 63% of respondents expect growth in take-privates.

Q4 2022 marked a change of fortunes for many stock markets following a punishing rout. The S&P 500 Index returned more than 16% in the first six months of 2023. However, this rebound was almost entirely led by the so-called “Magnificent Seven” of Big Tech stocks, whose valuations fell deeply in 2022.Between them, Nvidia, Microsoft, Apple, Amazon, Tesla, Alphabet and Meta accounted for more than 60% of the rise in the S&P 500 Index. There is still ample opportunity for sponsors, who now have more confidence that markets may have found their bottom.

It took a while for shareholders of public companies to adjust to the reduced valuations and get comfortable that this was the new normal for them. We’ve now seen a continued upturn but, even though the market as a whole is up, that’s not true on a company-by-company basis. PE firms are seeing a lot of opportunity there and there’s now a greater willingness to engage. The long-heralded wave of take-privates has now finally arrived.” Chris Field, Co-head of Dechert’s PE practice

Take-privates do, however, carry significant execution risks. Last year, many boards were circumspect about approaches from PE, although that reluctance appears to have softened. Nevertheless, gaining shareholder support can be challenging, particularly if there are vocal dissenting stakeholders or concerns about the fairness of the deal.

Determining the fair value of a publicly traded company can be contentious if its share price has come under persistent pressure. The offer price must be attractive to shareholders while still leaving room for sponsors to meet their cost of capital. Valuation disputes have the potential to draw out negotiations and can give competing bidders the upper hand if the target exercises its “go shop” rights or its “fiduciary out” in response to a superior, competing offer. This in turn has the potential to escalate the deal’s price and complexity.

Sponsors must think carefully about how to pitch their vision of the company’s future under private ownership, being mindful of the high level of scrutiny that boards’ fiduciary duties are under at public companies and the development of aiding and abetting claims against suitors in Delaware.

Footnotes

The preceding article is an excerpt from the 2024 Global Private Equity Outlook report, an annual publication that uses qualitative and quantitative findings to look at current PE industry trends and views on where the market is heading in 2024.