Private Equity Heads Toward Consolidation

Such transactions also establish new lines of business and provide for expanding into new geographic markets, Boston-based Bain said in a report.

On Monday, buyout firm TPG said it would acquire fellow asset manager Angelo Gordon. The transaction would mark a significant expansion into private credit just three years after TPG parted ways with Sixth Street Partners, its credit investing arm. The deal also would increase TPG’s assets by 54% to around $208 billion.

The number of strategic acquisitions announced or made by the world’s 50 largest alternative-asset managers more than doubled from 2020 to a decade-high of 25 in 2021, Bain said. Last year saw 18 such transactions, the second-highest total over the past decade.

Hugh MacArthur, Bain’s chairman of private equity, said the trend would accelerate over the next two to three years, particularly among publicly traded firms.

For instance, European buyout and infrastructure firm EQT hadn’t done any strategic acquisitions before going public in 2019. Since then, it has completed five such deals, including a $7.5 billion acquisition of investment firm Baring Private Equity Asia last year and buying real estate-focused Exeter Property Group in 2021, Bain said.

The two transactions established EQT as a major operator in Asia and as a U.S. real-estate investor, particularly in the logistics and industrial markets.

Private-capital firms often prefer to build businesses and teams in-house, but “what we’re seeing increasingly is that our industry is maturing, which means that it also becomes harder to do things on [an] organic basis," said Gustav Segerberg, EQT’s head of business development.

“That was the case for us in Asia, where we had an existing business, but we did not feel that we had the right capabilities to really scale it," Segerberg said.

Bain’s MacArthur said he expects improved market conditions to unleash a wave of acquisitions as more alternative managers go public. Such a turning point could arrive as soon as early next year, he said.

Despite their expertise in buying other businesses, private-equity firms have largely shied away from acquiring their own. Too often, Bain said, cultures clash, disagreements over compensation and sharing investment profits prove insurmountable, or talented people at target firms jump ship.

Finding a good cultural fit is critical, MacArthur said, “because the history of M&A in the private-asset class is not littered with glory. It’s littered with a lot of cautionary tales."

Executives of TPG and Angelo Gordon stressed compatibility in discussing their proposed combination during a conference call with analysts on Monday. Jon Winkelried, TPG’s chief executive, said the firm focused on finding a firm with a similar approach and culture. Adam Schwartz, Angelo Gordon’s co-CEO, said the tie-up “represents a strong strategic and cultural fit."

Blackstone’s 2008 acquisition of GSO Capital Partners stands out as a success story in the industry’s M&A history. Blackstone bought GSO, now the core of the New York firm’s credit operation, at a time when leveraged-buyout activity had largely ground to a halt during the financial crisis. Today, Blackstone executives say market conditions present a “golden moment" for private credit.

The Angelo Gordon acquisition offers TPG a way to benefit from positive trends as traditional lenders retreat and others step in, Winkelried said. The former Goldman Sachs Group executive on Monday said the regional banking crisis marked by the failures of Silicon Valley Bank and First Republic Bank made it harder for companies, particularly midsize and smaller businesses, to get financing.

Other deals have focused on expanding into new business lines. Last year, for instance, Franklin Resources, which operates as Franklin Templeton, acquired private-equity secondaries and co-investment specialist Lexington Partners to enter the rapidly growing market for secondhand fund stakes.

Still, other transactions aim to tap new territories, MacArthur said, citing the Asia-Pacific region as a logical place for U.S. and European firms such as EQT to expand. For firms outside the U.S., he said, deals aimed at geographic expansion often target the U.S., the world’s largest alternative-assets market.

Despite heightened regulatory scrutiny around private-markets investments and firms, MacArthur said he doesn’t expect such deals to face opposition from antitrust authorities because the transactions generally aren’t designed to expand a buyer’s share of its current markets. “A lot of the deals we’re seeing [are] not scale deals, they’re scope deals," where an acquirer aims to get into a different geography or asset class, he said.