Staying evergreen
As private equity firms limited their big deals for a second successive year, sponsor bankers had to stay nimble in 2023. For its work on landmark deals in technology and elsewhere, new financing structures, and prepping for better times ahead, JP Morgan is IFR’s Bank for Financial Sponsors.
Private equity firms pulled in their horns in 2022 and kept them in in 2023, although sponsor bankers still had plenty to do. There were some blockbuster deals in the tech, chemicals, healthcare and industrials sectors, work devising more flexible and different structures, and planning for how clients could put to use an estimated US$2.6trn of dry powder when better times return.
Difficult markets can also be where the strongest banks stand out, and JP Morgan did just that in 2023. The US powerhouse ramped up its ambitions for financial sponsor clients eight years ago, and at its investor day in May its top brass once again flagged serving such investors as a priority – including the potential to tap revenues across business areas.
JP Morgan worked on many of the biggest sponsor deals of the year, and on a broad variety which ranged from pet retailers to a company that enhances the quality of strawberries and raspberries.
There were several standout deals for Silver Lake, including its purchases of Qualtrics and Software AG and the completion of its US$69bn sale of VMWare. Other landmark deals included advising BlackRock on the sale of Creed Fragrances to Kering for €3.5bn; Viterra on its US$34bn merger with Bunge; BPEA EQT on the completion of its sale of Bushu Pharmaceuticals; and Apollo for its US$8.1bn purchase of US chemicals firm Univar Solutions.
But with many sponsor clients reluctant to commit to big ticket M&A or new listings in tougher markets, there was a need for more flexibility and innovation on options, and more structured deals so they could monetise investments.
“When you look at exit options in more volatile markets, you need to consider all options including co-control or a minority sale,” said Klaus Hessberger, global co-head of JP Morgan’s strategic investors group. He is co-head with Ina De, both based in London, and Avery Whidden, who is based in New York.
Carsten Woehrn, global co-head of the strategic investors group M&A team, said it was important in 2023 to “understand the pressure points” in sponsor clients’ businesses and help them navigate the best course.
“It is not a market where you can send out a catalogue. You need to take a bespoke approach, understand the potential buyers and any other counterparts. It also involves being able to judge if it is the right time for an exit,” Woehrn said.
The numbers show it was a testing year for the industry. Global fees for banks from financial sponsors were US$12.8bn in 2023, down 7% from 2022 and down 34% from the record level in 2021, according to LSEG data.
JP Morgan brought in US$1.03bn in sponsor fees, ranking second behind Goldman Sachs, according to LSEG data. JP Morgan’s fees were up 16% from a year before, the best performance across the top eight firms.
Even those hefty fees underestimate the importance of sponsor clients, however. Sponsors span PE firms, sovereign wealth funds, family offices and infrastructure and other funds. Bankers estimate they typically contribute at least one-third of investment bank activity, but fees are cut in many ways and a lot of deals are kept private.
Some regard 2023 as a transitional year: while some bankers fear a "golden decade" for PE has come to an end as higher interest rates increase funding costs and hurt returns, most observers are more upbeat.
After all, PE firms have US$2.6trn in dry powder, or uncommitted capital, available to use, according to an estimate from S&P Global Market Intelligence and Preqin. That is up from US$2.4trn a year earlier and US$1.8trn five years ago.
So a lot of work in 2023 involved preparing owners and companies to be able to move when conditions turn more favourable – possibly in 2024.
“There is a strong pipeline of high-quality sponsor transactions to come. Some exits that were earmarked for 2023 will still happen, but have been pushed out into 2024,” said Hessberger.
Pets and fruit
Silver Lake, the California-based firm that invests in technology and entertainment companies and has a portfolio worth more than US$1trn, had a busy year and JP Morgan was often alongside it, continuing a long relationship.
The bank provided advisory and financing for Silver Lake’s €2.4bn takeover of German software firm Software AG, which followed up a €344m investment in 2021 when JP Morgan advised it on the purchase of 2% convertible notes due in 2027. It then advised and financed Silver Lake and the Canada Pension Plan Investment Board’s purchase of US software firm Qualtrics for US$12.5bn.
In November, Silver Lake finalised the sale of cloud computing specialist VMware to Broadcom for US$69bn, a deal that stood out for its complexity and for landing the PE owner a huge windfall. Silver Lake told investors that deal was a “defining moment” for the firm.
Silver Lake paid US$128m in fees in 2023, more than three times what it paid in 2022, LSEG data showed. KKR, Apollo and Blackstone were the biggest payers of sponsor fees, each shelling out more than US$600m.
That shows long relationships can pay off handsomely for banks, and why clients often stick with a trusted adviser.
Indeed, JP Morgan’s role advising BC Partners on the sale of a stake in PetSmart to Apollo in July came eight years after the bank advised the firm and other investors on their US$8.7bn purchase of the retailer.
In Asia, the bank advised IBS Software and Blackstone on the sale of a minority stake in IBS to Apax Partners in May for US$450m, also after advising IBS in 2015 on the sale of a minority stake to Blackstone.
Adding to the varied mix for sponsors' teams, the bank also advised Cinven on the sale of Planasa, a Spanish R&D company for breeding strawberries, blackberries and other berries, to EW Group.
The need to consider new structures was shown when JP Morgan advised BC Partners on the sale of a minority stake in Italian packaging machines firm IMA Group.
“Everything is more structured right now,” said Woehrn, who was appointed to lead the global SIG M&A team with Haidee Lee in October. Woehrn is in London and Lee is in the US.
Woehrn said there was more interest in minority stakes given the market dynamics. “A buyer might not want to take full control right now, and can also take comfort that there is an incumbent owner or seller who will stay involved and may keep 50% for a period.
“For a seller it can give them a good partner who shares a common vision for their business and helps them realise some of the value they have created to date,” he said.
The bank also worked with PE clients on the rise in popularity of more hybrid or evergreen fund products, which have a more flexible or open-ended investment periods, to fill a gap in capital structures.
Full suite
JP Morgan’s SIG team, set up in 2016, now has more than 60 dedicated financial sponsor bankers around the world, including 20 focused on M&A. They can also call on the vast resources of JP Morgan's corporate and investment bank, such as its leading M&A, ECM, DCM and industry specialist teams, leveraged finance, FICC and equity trading, plus derivatives for risk management. And beyond CIB, there is JP Morgan’s huge corporate bank and private bank at hand.
It works both ways. The theory goes that a sponsor client might use multiple parts of CIB’s resources and its middle-market portfolio companies can also use the commercial bank, and then after an IPO an entrepreneur may opt for the private bank to manage their wealth.
Small wonder CEO Jamie Dimon is still so keen on the business.
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