Will there be an increase private equity investment deals in the coming months, after several years in which they went down a few gears due to inflated valuations of assets? In 2020 and especially 2021, valuations of many companies rose due to the stock market boom, and companies preferred to list on Wall Street either through a SPAC merger or an IPO in which they received a good valuation.
In 2021, the SPAC phenomenon peaked on Wall Street, in which inactive companies (special purpose acquisition company) were issued to the public with the aim of merging with existing private companies within an allotted period of time. Consequently, a large number of privately-held companies that in retrospect were not ripe for the stock market, began to trade at inflated values. At the same time, a record number of IPOs was also recorded in the US. It was tough for private equity funds to compete with these valuations and they preferred to wait on new investments, even if they did benefit from exits of some of their portfolio companies.
Then the situation in the markets changed completely, as interest rates soared due to inflation, publicly-traded companies market caps fell substantially. By late 2022 private equity funds enjoyed new investment opportunities with more sane multipliers, which could be used to expand portfolios to yield handsome future returns.
It hasn't really happened yet. The reason for this, according to sources working in the field, is that a period of time needs to pass to bridge the expectations of buyers and sellers. While private equity funds expect to complete deals at "new" prices, after the declines on stock exchanges, owners of target companies take time to adapt to the change in pricing and are waiting to see if the world really has changed, before agreeing to a reduced price. The result is a decrease in the number of deals signed this year.
A study published by S&P Global last month found that in the second quarter of the year there was a slight increase in investments by private equity and venture capital funds in the Middle East and North Africa regions. However, the number of deals decreased from 92 in the corresponding quarter last year to 62 in the second quarter. In the summary of the first half of 2023, the amount of deals fell from $9.3 billion to $7.6 billion, and the number of deals also fell.
It is possible that now, with stock market IPOs still almost non-existent, the deal flow (the amount of transactions in progress) that the private equity funds see is greater, and we could see new investments in the near future.
Looking from the sidelines at inflated valuations
Private equity funds raise funds mainly from institutional bodies and private investors. In Israel, the largest private equity fund is FIMI Opportunity Funds headed by founder and CEO headed by Ishay Davidi. Other leading funds include Fortissimo Capital headed by founding partner Yuval Cohen, Tena Investment Funds led by Ariel Halperin, Sky and Kedma Capital.
The largest private equity funds in Israel have a proven reputation in the enhancement of domestic companies in industry, services and trade, and their subsequent sale for a high profit. Despite impressive returns in the past, in recent years they have often had to look from the sidelines at companies with inflated valuations in which they wanted to invest, which gradually became disconnected from reality, due to the boom in the markets.
Despite all this FIMI has continued to invest hundreds of millions of dollars each year. The fund recently invested an additional $60 million in biopharmaceutical company Kamada (Nasdaq: KMDA; TASE: KMDA) for a controlling stake. New investments made by FIMI in the last two years include optical systems developer Gal Shvav, in which FIMI acquired control for $100 million, defense company Ashot Ashkelon (TASE: ASHO), which was acquired from Elbit Systems (Nasdaq: ELST; TASE: ELST) for NIS 291 million (for 85%, which today - after dividend distribution - is worth about NIS 409 million); and the AMAL Group nursing care company, in which FIMI acquired control for NIS 800 million.
FIMI also acquired 9% of Sarine Diamond Technologies (SES: U77.SI), possible with plans to buy control in the company. Last year FIMI completed an impressive exit from Infinya (Hadera Paper), which it sold to Veridis for NIS 2.4 billion, in a deal reflecting returns for FIMI of 300%.
Rising interest rates do less harm to a conservative fund
As far as investments are concerned, it seems that the FIMI sticks to its plans, even if the trend in the market is more cautious. In the end, funds of FIMI's type of should adapt activities to changing market situations. However, it is likely FIMI would also agree that today it is easier to buy companies than it was two years ago, and as a result it is quite possible that the fund is currently seeing an increase in the number of potential deals.
The rise in interest rates worldwide makes it difficult for leveraged companies and entities, or those that are required to raise debt to finance acquisitions, when the cost of financing has become very expensive over the last year. Due to a decline in the number of alternative buyers, FIMI and other private equity funds in Israel, which are not leveraged and enjoy access to huge capital that they raised ahead of time, can now benefit from a greater supply of opportunities and in 2024 the volume of transactions will climb compared to this year.
Published by Globes, Israel business news - en.globes.co.il - on October 4, 2023.
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