Small is beautiful: private equity adapts to the pandemic

Kaye Wiggins

When the Swedish private equity group EQT agreed a €1.3bn deal to buy Idealista, a Madrid-based property classifieds site in September, its peers took notice: the firm was striking one of its biggest deals since the coronavirus crisis roiled markets and brought dealmaking to a halt back in March. 

But a smaller, less-noticed EQT deal announced a week later was more representative of how private equity has adapted to the pandemic. 

It agreed to buy the Italian real estate platform Casa.it from private equity firm Oakley, a deal less than half the size of Idealista according to people familiar with the matter. That allows EQT to merge the two in a bid to create a European champion on the scale of Silver Lake-backed Zoopla and the FTSE 100-listed Rightmove. EQT declined to comment on the deals. 

Smaller deals, including so-called “buy and build” acquisitions like EQT’s real-estate move, have taken on a new significance in the wake of the pandemic. Private equity groups this year struck more deals than at any time since 1980, while spending far less than usual, figures from Refinitiv show. 

While the total value of private equity deals worth more than $10bn has fallen by 47 per cent this year, the value of sub-$500m deals is up 9 per cent. 

Smaller deals are easier to finance at a time when banks are wary about lending large sums. Some buyout groups see them as a way to avoid paying the hefty multiples that are still expected in many larger auction processes even as the pandemic brings uncertainty. 

Some private equity firms also see it as a way to keep their current deals profitable, even if they have to hold onto the companies involved for longer than planned - a move that would normally hit returns.  

“If you’ve got a business that’s run into headwinds through Covid-19, you’re more likely to double down and hold it for longer,” said Johnny Colville, a managing director at Houlihan Lokey. “If you’re signing up for another three years, you have the time to do the transformational M&A, the expansion into different geographies, to make the return you need.” 

Smaller deals can “turbocharge” returns if they are funded from a portfolio company’s own balance sheet rather than by tapping the private equity fund itself, he added.

The buyouts industry had already been turning to smaller deals before the crisis began, amid fears of a recession and after watching megadeals like Apollo’s planned $15bn purchase of metals group Arconic collapse. The pandemic, with its grim economic consequences and its associated travel restrictions, has accelerated that shift. 

“If I’m an investor and I know a management team through holding a portfolio company, I’m very comfortable growing the company [through add-on deals]… as an opportunity to come out of the crisis in a better position,” said Emilio Domingo, a partner at Bain & Company. 

“That’s a much safer route than to have to form relationships with a target company you don’t know, when the logistics [of meeting up] are complex.”