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A problem carved: Will private equity pick up your unwanted assets?

Global carve-out activity is booming and the party isn't expected to end any time soon. In a recent survey of dealmakers, corporates and PE professionals based in North America, EMEA, APAC and Latin America, almost a third of respondents say they expect more carve-out activity to be one of the most defining M&A trends in the aftermath of COVID-19.

No other trend, whether lapsed deals or fewer cross-border transactions, was as widely anticipated. But what does this mean for a company hoping to attract a PE suitor?

1/ PE has the money to spend and is ready to buy 

The stars are aligned for corporate divestitures, especially to the PE industry, which is currently loaded with funds and itching to invest—estimated to be in the region of US$2 trillion across various private capital strategies. Following the momentary deal pause early last year, strategic sales to PE were up to their highest levels for four years, to US$254 billion in H2 2020. The first half of this year saw US$281 billion in unwanted business arms going to buyout funds, according to Dealogic data.

2/ PE firms are prepared to make a clean break, which works well for cross-border deals

It is not only a surfeit of dry powder spurring these deals—private equity buyers also make ideal suitors for corporate assets. They can make swift decisions and are accustomed to the complexity of unwinding balance sheets and company operations from parent owners, many being specialists in this line of work. 

They also don't present the same kinds of regulatory risks that corporates buyers do. Since the pandemic, M&A authorities have been especially cagey about cross-border interlopers acquiring assets. Even domestically, antitrust concerns can easily be triggered. This isn't an issue when selling to PE, which makes carve-outs to financial sponsors a neat and tidy solution.

3/ Shareholder activism may drive deals into the hands of PE buyers

In the wake of the pandemic, not only do corporates need to de-lever their balance sheets, and adapt their strategies and operational models, their investors will be quick to let them know. Shareholder activism, which temporarily eased off last year during the worst of the crisis, has been rising, particularly in Europe.

Sixteen percent of respondents in the survey expect greater shareholder activism to be one of the two most important M&A trends to come from the pandemic. Whether repaying debt or investing in new technologies or into sustainability measures, companies need to raise cash from somewhere. Any non-core assets that are causing a drag on shareholders' return on equity will be the first to be voted for the chopping block by unhappy investors. And there won't be any shortage of PE funds at the carvery.