As competition and asset multiples increase, private equity (“PE”) firms must find new ways to put their money to work. One way to create new value is through a sponsor-to-sponsor deal.
Sponsor-to-sponsor deals involve PE firms on both sides of a transaction – buy side and sell side. Due to their high cost and complexity, there is a general view that sponsor-to-sponsor deals tend to be inefficient. However, a recent report by Bain & Company’s Annual Global Private Equity Report 2019 (Report) found that sponsor-to-sponsor deals are on the rise, which implicitly suggests that these deals may not be as inefficient as otherwise thought. The following are some of the potential benefits of sponsor-to-sponsor deals.
- Sponsor-to-sponsor deals provide opportunities for PE firms to be more creative in generating value. While such deals have previously been viewed as inefficient due to repeated transaction fees and other costs, engaging PE firms on both sides of a deal has the benefit of speeding up the entire transaction process. On a more granular level, the due diligence process in sponsor-to-sponsor deals can be completed at a faster pace compared to other transactions and as such, the extra time saved allows PE firms to focus more on strategy and creative solutions.
- Sponsor-to-sponsor deals remain an important exit option. In 2018, Sponsor-to-sponsor deals provided PE firms with great opportunities to increase returns. According to the Report, for the year 2018, most deals in Europe were PE sponsored deals and their exits generated the third-strongest year for the industry. In addition, deal count and deal value for that year were dominated by sponsor-to-sponsor deals.
- Current market conditions encourage large investors to focus on investing capital in private instead of public companies. Recently, private company multiples have been equivalent to or higher than those of public companies, making IPOs a less attractive exit option than before. Instead, the best option may be to sell to a strategic buyer that is looking for growth. Alternatively, the investor could sell to another PE firm that has the ability to capitalize on synergies and take the company to a new performance level. As a result, sponsor-to-sponsor exits may soon become the new normal and limited partnerships should work towards being more comfortable with the idea that sponsor-to-sponsor transactions may become a bigger part of the deal market.
Overall, sponsor-to-sponsor deals are increasing in popularity. The benefits are evident especially in the current deal market. Where assets may approaching an overpriced valuation, or dealmakers grow hungrier to put their money to work, sponsor-to-sponsor deals may soon become thrive in the marketplace.
The author would like to thank Bikaramjit Sandhu, articling student, for his assistance in preparing this blog post.
Stay informed on M&A developments and subscribe to our blog today.