Buyout activity has been increasing throughout the COVID-19 pandemic – assumed to be the result of low interest rates and limited inventory. Moving into a post-pandemic environment, buyout activity is expected to remain strong in 2022; however, minor slowdowns are expected compared to the previous year.
Mark Hauser, private equity investor and fund manager, as well as the founder and co-managing partner of Hauser Private Equity (HPE), reflects on recent predictions about buyout activity in 2022. Hauser has invested more than $300 million in capital in privately owned businesses across a diverse set of industries throughout the country. Prior to founding HPE, Mark Hauser was vice president of Reynolds Dewitt Securities, based in Cincinnati, Ohio. While there, he specialized in merchant banking that resulted in public offerings of Mid-American Waste Systems, Future Healthcare, and Health Images. Mark Hauser has served on the board of directors for consumer goods and food and beverage brands. He has also served on boards for government-contracted security and defense businesses and digital advertising and textile manufacturing.
Here, Mark Hauser reflects on how current economic trends will impact buyout activity in 2022.
Private Equity Deals Contributing to Recent Activity Boom
In 2021, leveraged loan sales driven by buyouts were the highest since 2013, with more than $600 million in transactions. According to data recently compiled by Bloomberg, private equity accounted for more than $5 trillion of acquisitions globally or 24% of total transaction volume. The largest transaction since the global financial crisis of 2007-2008 was the buyout of a majority stake in Medline Industries Inc., a privately held manufacturer and distributor of medical supplies that provides products, education, clinical programs, and services across the continuum of care with offices in 20 countries, led by Blackstone Inc., Carlyle Group Inc., and Hellman & Friedman. This $34 billion buyout relied on nearly $7.73 billion, in both euros and dollars, of leveraged loans for financing.
The transaction marked an opportunity for private equity buyouts, reports Grant Moyer, head of leveraged capital markets at Mitsubishi UFJ Securities USA. Mark Hauser agrees that the transaction created greater motivation for private equity firms to look for alternative situations. HPE oversaw several transactions that leveraged the unique dynamics of the COVID-19 environment, which placed the firm in an optimal position for continued transactions in 2022.
The Impact of Rising Rates
The Federal Reserve recently announced that rates are expected to rise three times over the next 12 months and another three times during the following year. As rates rise, leveraged loans become more expensive, resulting in fewer buyouts. As a result, 2022 is likely to see a shift in volume after rates start to rise.
Until rates are adjusted, however, buyout activity shows no signs of slowing down as private equity firms continue to seek the unique opportunities presented by the COVID-19 pandemic. Private equity firms have capital that must be deployed – roughly $960 billion, according to London-based investment data company Preqin, which provides financial information on the alternative assets market. Hauser supports the prediction of John McAuley, co-head of debt capital markets for North America at Citigroup Inc., who says, “[Private equity firms] are deploying their capital into transactions, and that’s what’s driving volume.” He continues, “There is a lot of money that [has] been raised that needs to get invested.”
Low Supply Driving Prices
In addition to low rates, Mark Hauser identifies low supply as a contributing factor to increased transaction volume in 2021, a trend that is likely to continue in 2022. Competition for quality assets is driving firms to overpay, especially in circumstances where capital needs to be deployed. Analysis reveals that this trend has been active for nearly four years and is expected to continue throughout the year. However, lenders are not as lenient as they were in 2008 and are conducting more thorough due diligence on transaction lending. They are now working with private equity firms like Hauser Private Equity to avoid rash decision-making, conducting deeper analysis in the hopes of gaining larger returns and long-term growth.
So far in 2022, Hauser and the HPE team have been leveraging liquid capital and loss supply, disposing of shares in numerous funds. The firm’s flexibility has enabled it to take advantage of shifting trends, leveraging interest rates to improve its position.
Inflation Impacting Transactions
This year has seen several shifting trends compared to previous years as the COVID-19 pandemic continues to disrupt industries. Additional factors outside those directly related to buyout activity have an indirect impact on private equity transactions. Inflation has surpassed previous records, and ongoing risk is possible. As a result, costs have been pushed upward, and investors have had to alter their approach for assessing the potential long-term impact created by this immediate economic shift.
Gains Influenced by Interest, Not Values
Buyout activity has generally been driven by value-add opportunities, where restructuring and collaboration can increase a portfolio’s value. However, with today’s low interest rate and aggressively priced environment, opportunity is available to those who leverage low interest rates rather than those seeking higher returns on investments. Data reveals that banks’ estimated returns range from 1.8% to 4.5%, with many seeing returns primarily from interest. As a result, flexibility is somewhat limited, points out Hauser, especially in heavy cash flow industries. For example, those investing in healthcare will see returns in interest while paying higher prices for those investments.
Pull Back in M&A Activity
Although volume is breaking historical records, a slowdown in activity may occur in 2022. Mark Hauser supports the theory that the uptick in 2021 was driven by those who had been waiting to make moves in 2020 – the year of greatest uncertainty surrounding the COVID-19 pandemic. As those deals move forward, transactions are expected to resume normal activity, with influences coming strictly from current economic conditions instead of a backlog of activity. If transaction volume continues at the rate of 2021, we are likely to see unprecedented volume compared to previous historical numbers.
Ongoing Strong Performance
Hauser’s insights reveal that strong performance will likely continue in 2022, with minor setbacks from potentially higher rates. However, as industries adapt to the changing atmosphere after COVID-19, capital will continue to be deployed, providing opportunities previously unavailable. Lending will continue to be favorable for companies looking to leverage appreciation and interest rates, although price gains may remain limited in private capital markets.
About Hauser Private Equity
Hauser Private Equity (HPE) is headquartered in Cincinnati, Ohio, with offices in California and Illinois. Founded by Mark Hauser in 2008, the firm is a hybrid private equity fund manager that follows Hauser Capital Partners’ successful strategy of directly co-investing in lower-middle and middle markets via partnerships with control buyout funds and selectively with managers of growth equity and special situation funds. Leveraging the collective, multi-industry expertise of its directors and limited partners, the firm strategizes to conduct due diligence for targets, grow companies, and enhance returns. Today, the firm funds between $200 million and $2 billion, depending on the underlying investment strategy.
Hauser Private Equity’s current investment portfolio expands across 20 states with more than 50 private equity fund partners in industries that include consumer goods, education, energy, financial and business services, health care, industrials, manufacturing, media, and software.
