Private equity firms are controlling business takeovers around the world, raising huge amounts of money and aggressively pursuing acquisitions. But what is driving the current trend?
News about takeovers abounds, particularly takeovers by private equity firms. Recent deals in Japan include Hitachi Koki and Calsonic Kansei, a Nissan Motor unit, that were separately bought by Kohlberg Kravis Robert, or KKR, in the U.S. The planned sale of Toshiba’s chip-making unit may go to American investment firm Silver Lake Partners, and European investor JAB Holding said earlier this month it had agreed to buy an American restaurant chain.
Investors are pouring money into private equity funds. According to an early April estimate from research firm Preqin, these funds raised a combined $89 billion worldwide during the January-March quarter. The final figure will likely top $100 billion or so. The largest fund created during the quarter was KKR Americas XII Fund, worth $13.9 billion.
The is a significant increase compared to the same quarter in recent years, and is close to the last high of $105 billion posted in the same quarter in 2008 — just before the global financial crises slammed markets.
Dynamic investment environment
At present, some 1,908 funds worldwide are looking for investors. Their combined amount is believed to be about $635 billion, including the 12.5 billion euros ($13.2 billion) for a single fund run by CVC Capital Partners. The Nikkei Asian Review on April 5 reported that the British private equity firm plans to invest 100 billion yen (about $900 million) a year in Japan.
As a whole, private equity funds are increasingly keen to acquire businesses anywhere in the world. Public pension funds, as well as colleges and other foundations, are major contributors to these funds. These investors typically do not hunt for short-term returns, making them ideal partners for many funds whose investment terms, from fund creation to liquidation, are generally five to seven years.
Gap widens, opportunities increase
During an economic recovery, a gap typically widens between well-performing businesses and those on the other end of the spectrum. This triggers buyouts and business restructuring, which funds see as opportunities. According to The Wall Street Journal, U.S. office supply company Staples is currently negotiating with several investment funds for its own sale as a result of rival Amazon.com’s powerful market presence. So where are we in the current global economy?
The Global Manufacturing Purchasing Managers’ Index, calculated jointly by J.P. Morgan and IHS Markit, posted 53.0 in March — second only to the high of 53.2 in May 2011. This is largely attributable to the strong PMI readings in emerging economies, led by the recent recovery in resource prices, as well as China’s robust infrastructure spending. The strong PMI of emerging economies in March was equivalent to its latest peak in July 2014 at 51.6.
Stable economies, positive outcomes
With both advanced and emerging economies stable, the world appears to finally be exiting the adjustment period after the 2008 financial crises. The situation has greatly improved from a year ago when global markets were shaken by China’s currency crash.
But as private equity funds appear to thrive in the current economic climate, problems can arise. Money pouring into funds can raise the price of takeovers, which in turn negatively affects fund yields. This typically pushes funds to consider taking countermeasures, including reducing staff in acquired businesses and possibly declaring bankruptcy. Eventually, the entire economy could be affected.
But the growth in demand at present is not as powerful as in past economic booms, and lacks tangible benefits such as higher wages. In order to thrive in the current economic climate, making the most of private equity funds could be an effective option for many businesses.