At investment fund 3i they know one law like no other: you do not always have to quickly resell an acquired company to make a good profit from it. In 2011, British investors paid 500 million euros for a majority share in the North Holland retail chain Action. That interest is now worth almost 15 billion euros, as was revealed in November when the latest results.
Of all the bargains in Action’s history, the store chain itself appears to be the most lucrative. And then that investment also yields hundreds of millions of euros in dividends every year. Normally, 3i aims to resell acquired companies within three to five years – at a profit – but the investor is certainly not selling off the Action shares for the time being.
In the past year, more companies remained in the hands of the same investor for longer than originally planned, but this was not always out of luxury, as was the case with Action. Private equity investors – who invest money from pension funds and wealthy private individuals, among others, in company takeovers – set a record in 2023 when it comes to companies that were not sold within the planned period. According to calculations by consultancy firm Bain, this would involve companies worth 2.8 trillion dollars, which investors unwittingly were not sold. Private equity owners generally hold their companies for five to seven years.
One of the explanations for this is the reduced interest in new acquisitions among investors themselves. According to market research agency S&P Global, which spoke of a “quiet 2023”, the number of takeovers by private equity parties worldwide fell by 32 percent last year compared to 2022. Another common option for private equity investors to get rid of shares in a company, an IPO turned out to be hardly feasible in 2023. For example, at the Damrak in Amsterdam, there were exactly three IPOs of new companies.
At the same time, investors were left with record levels of uninvested capital. According to S&P Global In mid-December, it amounted to 2.9 trillion dollars – money that funds had raised from their lenders, but which had not yet found a destination in the form of a company takeover.
All in all, the figures paint a picture of a fairly stagnant market. In the world of fast investors, the momentum seems to be slowing down, here and there some investors have already called that this should not last “much longer.” Investment funds cannot keep companies in their portfolio forever. After a predetermined period – usually ten years – the fund must be ‘closed’, the lenders will then receive their investment back and all assets must be sold.
In order to offer those lenders – often pension funds – the return promised in advance, enough companies must be sold every year. For investment bankers who supervise deals, the lack of transactions means financial setbacks: their income fell by 40 percent last year. complained a banker The Financial Times.
Increased interest rates
The cause of the delay is obvious: increased interest rates. Acquisitions are often made partly with borrowed money, which has become more expensive, meaning that investors can borrow less and therefore pay lower amounts for acquisitions. At the same time, selling parties usually do not accept a lower sales price, because their companies are often still running well – there is still no question of a major recession.
“Central banks have tried to slow down the economy with their interest rate hikes in order to curb inflation,” said Koen Ronda, head of private investments at IBC Capital Management. “That has an impact on investors. Filling a company with debt and achieving good returns without making real improvements is no longer that easy.”
According to him, the extremes of the market in particular have been affected. Less capital is available for both investments in start-ups and large billion-dollar acquisitions. Big hits, such as the takeover of sun protection manufacturer Hunter Douglas by investor 3G at the end of 2021, have not been seen for some time. The companies in the segment in between, medium-sized enterprises with a value of several tens to hundreds of millions of euros, remained in demand in 2023, says Ronda. “That segment is performing best, because the growth is greater and there is more room for acquisitions with less borrowed money.” According to him, there are opportunities in healthcare and IT, for example, especially when investors can acquire several companies in one sector and merge parts of them; An buy and build-strategy.
Investors can save costs in this way and thus increase profitability, although this strategy sometimes results in controversy: private equity owners in childcare, general practitioner care and the veterinary sector, among others, came under fire for their pursuit of returns.
Most experts expect the market to pick up next year. The time for large interest rate increases seems to be over, funds are full of capital waiting for a destination. According to Matt Vorachen, portfolio manager at Achmea Investment Management, some investment funds also deliberately waited last year to sell their companies until the market became more favorable again. “If you assume a certain return and you expect interest rates to normalize and then fall, then you wait a while. Then only the period until the exit becomes a little longer.”