Going private isn’t easy—or cheap

Perhaps the most-watched (and tweeted) deal so far this year has been Elon Musk’s attempt to take over Twitter. The CEO of Tesla and SpaceX, Musk first pledged to take the social media giant private once the deal closed. With that deal now in jeopardy, it doesn’t seem that $TWTR will be leaving the New York Stock Exchange anytime soon (at least, not before October).

Going private can be an arduous process, and even for private-equity (PE) firms, buying a company with the intent of taking it private isn’t always cheap or easy.

One big appeal of going private—especially for a company like Twitter which has been criticized for failing to innovate quickly enough for investors’ liking—is that it can potentially reduce the amount of public scrutiny on its every move. In a turbulent public market, some private-equity firms are looking toward companies that are beginning to show signs of distress —ones that have taken on too much debt on their balance sheets.

Going private in a volatile market can have its upsides—decreased reporting costs, less investor pressure, and a shield from the scrutiny of the ever-watching public eye. That is not to say it’s smooth sailing; private companies tend to have a harder time raising cash, since they cannot access public market money as easily. If they are in need of additional investment, private companies need to sway investors with potential versus reported metrics.

Why now? When companies are bought out, little is left to chance, according to Schroders Wealth Management. The equity firm, in most cases, has done an in-depth analysis with a specific vision in mind. Now, with capital markets dipping, potential assets could bring a pretty price for PE firms.

“The types of companies we are looking at, I think they’re seeing…it’s going to be a rough couple of years and now may actually be a good time to get out of the public markets or sell a division to shore up capital,” Apollo Asset Management Co-President Scott Kleinman said at an Alliance Berstein conference in June.

Private-equity (PE) firms are known for buying businesses, overhauling their current practices, management, and workforce with the hope of increasing performance, and then selling the asset—aka turning a withering business into a blossoming one.

Not so fast: The cost of borrowing, a critical piece of a leveraged buyout, is rising due to the Federal Reserve raising interest rates. And Fed Chair Jerome Powell has said that it will continue to raise rates until “we see inflation coming down,” further increasing borrowing costs. Thus far, there has been a dip in private-equity activity—in the US, there have been $373 billion in announced deals, down from $570 billion at the same time last year, according to Dealogic.

In “these periods of transition, these periods of a rising rate or slowing economy, and even a recession,” Kleinman said, is the time that Apollo “typically shines.”

“Over the past 14 years, we’ve probably worked much harder than we needed to, to find those good companies at reasonable prices so that we can earn really high-quality returns,” Kleinman said. Now, private-equity firms might not have to dig too hard to find cheap(er) companies to buy as stock prices dip.

Sitting on cash: While acquiring and taking a company private can be costly, at the end of 2021, PE firms had an estimated $2.3 trillion of unallocated cash, according to a report from the Harvard Law School Corporate Governance forum. And with IPOs slowing down in a cooling market, there could be room for other creative acquisitions.

A buyout can be a volatile period for company executives and employees alike, but it can sometimes lead to stronger outcomes. Hilton Hotels (hey Paris) was bought by Blackstone in 2007 for $26 billion. When the company went public in 2013, investors made $12 billion, making it one of the most successful buyouts ever.

While PE firms are known for buying out companies, consulting firm Bain & Co. found that non-buyout private investing categories such as growth equity and venture are increasing as firms look to diversify their portfolios. The consulting giant also finds the explosive activity that occurred in 2021 is similar in some respects to the market’s last peak in 2006–2007 where buyout deal value averaged around $800 million. In 2008, the market crashed, sending deals down from the year before by $553 million on average.–KT