Private Equity Is Struggling to Overcome Doubts on Valuations

(Bloomberg) — Blackstone Inc., Apollo Global Management and a host of private-capital mammoths have pledged to invest hundreds of billions of dollars in Europe over the next decade. But the immediate outlook for buyout deals is still looking pretty dicey.

After years of stagnant dealmaking, M&A bankers finally had some cause to celebrate in the last quarter as several big-ticket corporate deals were signed and fears about US President Donald Trump’s tariff policies abated somewhat — temporarily, at least. And yet, most buyout firms are in no mood to party.

While stock markets have hit fresh highs lately, refueling hopes of a bumper year for dealmakers, people working in private equity remain skeptical. Multiple capital-markets executives, who didn’t want to be named discussing commercially sensitive matters, said the spike in valuations in public assets was pushing up the mooted price of their private counterparts, making an already challenging sales process more difficult.

As well as struggling to sell, buyout firms have been reluctant buyers, too, barring a few exceptions such as KKR & Co. Even as overall M&A values bounced in the three months through June, private equity transactions faltered. The industry’s deal spending fell more than a fifth year on year, according to provisional data compiled by Bloomberg.

One important factor has been how hard it’s become to reconcile the high cost of the debt used to fund buyouts with the rising value of targets. “We’re seeing clients running the calculations to assess whether the package as a whole for a debt-financed public-to-private deal could be said to be sensible,” said Jeremy Duffy, a partner at law firm White & Case.

US buyout firm Platinum Equity put the sale of its Spanish waste management company, Urbaser SA, on ice after a lengthy process failed to reach agreement with potential buyers that had included Blackstone and Abu Dhabi sovereign fund ADQ. Like lots of other private equity owners eager to return cash to their investors, Urbaser’s sponsor chose to pursue a €2.3 billion ($2.7 billion) debt deal to fund a dividend payout and refinance existing borrowing.

The gap between sellers’ expectations on value and what buyers are ready to pay has plagued the M&A market for a while, with potential private equity buyers wary about repeating the mistakes of the last buyout boom at the turn of the decade when many firms overpaid for assets. Brookfield Asset Management abandoned a bid for Spanish drugmaker Grifols SA late last year because of disagreements about the valuation. Tentative talks did resume a few months ago, Bloomberg reported.

Initial public offerings of PE-backed companies have also hit roadblocks in Europe. Apollo-backed Autodoc SE, a German car parts retailer, postponed its IPO last week. Medical tech company Brainlab did the same on Tuesday.

Buyout firms often use the value of comparable publicly listed companies to price their own assets. But that’s a harder sell right now, several market participants said, because buyers don’t trust that giddy public markets are reflecting business’ fundamentals. In the US, much of the rebound after Trump’s April tariff bombshell has been driven by retail investors. In Europe, stock prices have benefited from a rebalancing away from US political risk.

“You’ve got higher equity values than most potential buyers and lenders are willing to stomach,” said Sabrina Fox of Fox Legal Training, a leveraged-finance expert. At the same time PE funds’ investors “are expecting returns of capital after years of M&A slump. Dividend recaps are the riskiest type of financing, but with market dynamics such as they are, we’ll likely continue to see them.”

Private equity buyers are being doubly careful because they’re regularly having to put in more of their own equity to finance deals compared to the past. The industry traditionally funded its acquisitions through loading up the target companies with heavy borrowing, but this flip in the model means they’re having to bear more of the investment risk themselves.

Still, private equity sellers will be hoping that their long period of struggling to find buyers will be made easier by the wall of money ready to be deployed, especially in Europe — and if economists’ gloom about the US proves misplaced.

There’s also optimism that once the logjam of sales is broken, the mood among investors in private equity funds will start to improve if they see meaningful returns. That would make fundraising easier, providing more cash for deals.

Blackstone is planning to invest as much as $500 billion in Europe over the next 10 years, Chief Executive Officer Steve Schwarzman said in a recent interview. In a conversation with Bloomberg News, Apollo’s president Jim Zelter said his firm could deploy as much as $100 billion for financing in Germany alone over the next decade, in an effort to fund Europe’s “renaissance.”

While private equity owners have been adding more and more leverage to their companies to keep them going and to pay investor returns, some are trying to do this without putting off future buyers. Urbaser’s financing, which raised about €1 billion of extra debt for the dividend, is portable. That means it can stay in place if the company changes hands — a feature that could make the asset more attractive to buyers by locking in stable funding.

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–With assistance from Fareed Sahloul and David Morris.

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