Acquisitions Venture capitalists have so much money that their wrists are forced, and that’s why even war doesn’t stop the accelerating boom in acquisitions

Even if private equity investors no longer raise a dollar of new investment funds, the money already raised could be used to invest six years in new properties in the same volume as in 2019, says Pyry Vauramo, a partner in the Finnish branch of the consulting company Bain & Company.

For private equity investors and companies have so much free money to invest in acquisitions that the acquisition market can be expected to remain buoyant for that reason alone.

“Even if venture capitalists no longer raise a dollar of new investment funds, the $ 3.4 trillion already raised [3 400 miljardilla] the dollar could invest six years in new properties in the same volume as in 2019, even if no new money is raised, ”says a partner in the Finnish branch of the consulting company Bain & Company Pyry Vauramo.

Information can be found in the American Bain & Company About the Global Private Equity Report. This is an annual report on the acquisitions of private equity investors.

It and a recent deal on business-to-business acquisitions Global M&A Report 2022 is one of the most comprehensive acquisition reports in the world.

Recent reports from Bain & Company were compiled in December-January before Russia’s invasion of Ukraine.

Nevertheless, the information in the report is still relevant in many respects.

The report will help to understand, for example, why Finnish technology companies with fast-scaling business models, such as Wolt, Aiven and Relex, have received so much funding and why their market values ​​are falling into the billions.

“Over the past five years, the private equity market for growth companies has exploded,” says Vauramo.

Year 2021 was record-breaking in many ways in terms of so-called strategic acquisitions between companies.

When industrial companies made $ 2,600 billion worth of acquisitions in 2020, they made nearly 50 percent more last year, $ 3,800 billion.

The number is the second highest after a record year in 2015.

At the same time, the valuation level of the companies to be acquired rose to a record high – the value of the acquired company was on average 15.4 times the company’s EBITDA. EBITDA shows how much money is left when only the company’s operating expenses are deducted from net sales, but not, for example, depreciation and financing expenses.

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Prices were highest in the strategic companies’ strategic deals – an average of 25 times EBITDA. The corresponding figure a year earlier was 20.

Bain & Companyn The report also examined how the revenues of listed companies that had made various acquisitions had developed in 2011–2020.

According to the study, the average annual increase in the value of companies that made acquisitions was 7.9 percent. Both the development of the market value and dividend income have been included.

Companies that made a lot of acquisitions achieved an increase in value of more than ten percent. Companies that had rarely done but made big deals were the worst performers. The annual increase in the value of such companies was 5.1 per cent, says the director of Bain & Company’s Finnish office Jani Kelloniemi.

According to a Bain & Company study, 64 percent of all acquisitions in 2021 were trades and mergers of industrial enterprises.

However, the growth of private equity firms, hedge funds and spac companies set up for listed acquisitions in acquisitions is clearly faster.

Acquisitions made by private equity investors even doubled last year compared to 2020, when the number of strategic acquisitions increased 1.5 times.

United States covers about half of the acquisitions in terms of transaction value, and Europe and Asia each account for about a quarter of the market.

The large share of the United States is not in itself a miracle, as already 80 percent of the global value of listed shares comes from the United States.

Of the industries, acquisitions by technology companies were the largest single industry, but companies in the media, consumer goods and finance sectors were also acquired a lot.

The number of acquisitions was lower than in the previous year, but the average size of the companies to be acquired increased significantly, Kelloniemi says.

Acquisitions is also considered an important part of corporate strategy.

According to a survey of Bain & Company’s 300 executives, as many as 80 percent of respondents saw acquisitions as a key part of the company’s strategy or how acquisitions support the strategy.

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Over the past decade, acquisitions have seen a trend in which companies have sought to expand into new industries or seek new capabilities in search of growth.

Last year, that trendy development ended, Kelloniemi says. “In 2021, more economies of scale and efficiency were sought.”

in Nordic countries the number of acquisitions in 2021 was staggering.

While the number of industrial acquisitions globally increased by 47 per cent, the value of acquisitions of industrial companies in the Nordic countries increased by 145 per cent from the previous year.

Growth was thus three times the rate of the world.

Acquisitions by private equity investors in the Nordic countries also grew sharply, by as much as 121 per cent from 2020.

2020 was also busier than 2019.

In all acquisitions were made in the Nordic region in 2020 for a record $ 169 billion.

The difference from the previous year’s record of 71 billion or the previous record of $ 112 billion in 2017 is so significant that we can speak of a Nordic acquisition boom.

It is also worth mentioning that in industrial acquisitions, Nordic companies themselves bought more companies from other countries in monetary terms than what was sold abroad here.

“At least in this respect, the concern about the deregulation of the Nordic countries as a subsidiary economy seems excessive,” Kelloniemi reflects.

In Finland the purchases of foreign investors were increasingly targeted at already well-functioning growth companies, which typically seek hundreds of millions in financing rounds to finance their growth.

In the past, risk investors were particularly interested in so-called early-stage companies.

Kelloniemi and Vauramo believe that the recent rounds of financing hundreds of millions of Finnish growth companies are clearly a good thing for Finland.

In the past, there was a shortage of growth funding in this size range.

“Now that capital is available. There are a lot of good companies here that are not yet known. Now they don’t have to go public or sell themselves to a strategic buyer, ”says Vauramo.

Russian after the invasion of Ukraine, many have wondered how little the war has scared investors. The real estate market in Finland has grown there is not even talk of country risk.

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Kelloniemi and Vauramo say that trade negotiations in acquisitions have continued uninterrupted so far.

The acquisition market is still hot, they say.

This is partly explained by the fact that, due to the long-lasting stimulus policy of the central bank, there are now plenty of funds to invest.

There is also a broader and longer-term trend behind it. Venture capitalists have a lot of money for which they earn returns, and private equity funds have historically outperformed listed stocks in the long run.

This development is expected to continue in the coming years, and therefore institutional capital is expected to be allocated more to private equity funds, Kelloniemi and Vauramo explain.

Phenomenon describes well the amount of free investment funds already being raised by venture capitalists in search of suitable investments mentioned at the beginning of this story brings in a staggering $ 3,400 billion.

Many hedge funds that invest in growth companies typically charge a 2 percent management fee on the funds they raise.

The funds raised in the fund are therefore already reduced by two per cent a year due to the management fee. At the same time as accelerating inflation eats up the value of the funds raised, there is a burning need for funds to park their assets quickly for growth companies, otherwise their value will dwindle rapidly.

With portfolio managers there is also an incentive to invest the same funds as quickly as possible so that they get the next fund.

“At the same time, however, funds should consider time diversification over the fund’s lifecycle to reduce investor risk,” Vauramo recalls.

In addition to these funds, many companies have accumulated large cash reserves during the fat years.

Apple alone has $ 200 billion in cash, and three American technology giants alone have thousands of billions in quick cash assets.

The amount of money looking for loose investment targets therefore helps to explain the high valuation levels of companies.

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