Key trends in Private Equity and Activism

Question 1

What are the reasons behind the 2023 sponsor M&A volume slowdown?

Answer 1

1. Borrowing costs/Interest Rate Environment
2. Heightened recession risk and macro dynamics
3. Periods of challenged institutional loan markets
4. Risk-off investment committees & co-invest capital
5. Grwoth in secondary market + other liquidity solutions outside of traditional M&A
6. Sponsor exit activity at fifteen year low

Question 2

What are some general trends in Global and Sponsor M&A performance in 2023?

Answer 2

1. Global M&A volumes remain below 10-year averages, however notable acceleration of activity in 2H2023 suggests possible inflection
2. Sponsor M&A volumes hit 10-year lows in 2023 driven by a lull in sponsor sellside activity; the last six quarters have demonstrated market stabilization
3. P2P share of Sponsor M&A transactions remains at all-time highgs

Question 3

What are some general trends that can be expected fro Sponsor M&A activity for 2024?

Answer 3

1. US economic activity signals improved M&A environment ahead as more visibility into rate environment, equity markets at all-time-highs and a lower probability of recession create a more constructive outlook for deal making
2. Regulatory environment and elections across 40 nations globally create some uncertainty in path forward
3. Leveraged loan market continues to strengthen and expected to become increasingly supportive of M&A financing; GS financing capability across both syndicated and private credit is differentiating to both sponsor sellside and buyside activity
4. Investor focus on low levels of DPI increases pressure on sponsors to generate liquidity through M&A or alternative solutions including the secondary market
5. Private markets remain open for high-quality issuers with pragmatic valuation expectations and/or raising a structured security
6. Reopening of the IPO market as a liquidity alternative, with anticipated increased deals count and volume

Question 4

What is shareholder activism?

Answer 4

• “Activism” represents a range of activities by one or more of a publicly traded corporation’s shareholders that are intended to result in some change in the corporation to unlock value for shareholders.
• The activities fall along a spectrum based on the significance of the desired change and the assertiveness of the investors’ activities

Question 5

What are some common types of activism?

Answer 5

1. Hedge fund activism: A hedge fund seeking a change in company strategy, financial structure, leadership, or transaction to return value
2. “Vote No” campaign: An investor campaign urging shareholders to withhold their votes from one or more board nominated director candidates
3. Shareholder proposal: A shareholder proposal to effect a change in board’s governance policies and practices
4. Say on Pay: Shareholder activities intended to spotlight the disconnect in performance and compensation

Question 6

What are factors for engagement for activists?

Answer 6

1. Equity markets recovered from the lows but uncertainty and challenges remain.
2. Lower and volatile markets continue to create favourable entry points for stake building
3. Increasing number of investors leveraging the activist toolkit
4. Continued elevated levels of private engagement across Europe

Question 7

What are focus areas for activists?

Answer 7

Protfolio simplification and M&A related demands:
1. Activists pushing for strategic review:
* Push companies to initiate strategic review and put themselves for sale
* Activists can alos act as M&A matchmakers to start processes
2. Activists pushing for Break Ups/Simplification
* Activists continue to push management teams to review portfolio compositions and identify opportunities to unlock value through break up or separation of non-core assets
3. Activists Opposing M&A
* Public criticism of business combination, stating “no strategic rationale”/”value destructive merger”/”not a good deal for the business nor shareholders”/”not the right deal terms”
4. Activists Pusing for Enhanced Deal Terms (“Bumpitrage”)
* Activists accumulate position in target company post announcement of merger deal with view to increase bid price

Question 8

How do activists choose their targets?

Answer 8

1. Stock performance / relative valuation
   * TSR relative to peers
   * Valuation discount to peers
   * Operational metrics
2. Potential transactions
   * Canidate for a transformative transaction:
   - Capital structure
   - Break-up, restructuring or other outsized returns
   - Consolidation/LBO opportunities
3. Shareholder base
   * Track record of supporting activism
   * Composition of investor type and style
4. Corporate Governance
   * Capacity of shareholders to replace directors or submit shareholder proposals
   * Poor ratings or recommendations from governance advisory firms

Question 9

What are trigger events for activist intervention?

Answer 9

1. Corporate events
   * Falling short of market expectations
   * Announcement of a change in corporate strategy
2. Macro events
   * Copmarable transaction crystalises potential value of target’s assets
   * Shift in sector dynamics
3. Structural/Legal
   * Key process (e.g. timing of escalation ahead of an annual meeting)
4. Market sentiment
   * Growing expressions of market dissent
   * Rumors of activist accumulation
5. Liquidity
   * Timeframe to accumulate position without moving stock price
   * Short term spikes in trading volumes

Question 10

What are some of the best defence tactics against activists?

Answer 10

1. Activist attack and Defence Arguments
2. In-Depth Valuation Update
3. “Break the Glass” Plan
4. Equity story and investor relations
5. Share register
6. Leadership preparation