Beyond Sponsor-to-Sponsor: The Rise of the Strategic Buyer in European Private Equity - Ropes & Gray LLP

According to a Ropes & Gray LLP Insights piece by the firm's authors, the sponsor-to-sponsor deal has long served as a dependable exit for private equity, but that reliance is fading at the top of the market. The authors, who were quoted in a Bloomberg article titled "Private Equity Finds Corporate Crutch for Exits," state that corporate buyers are becoming a central part of the exit landscape and are likely to remain so.

The firm distinguishes between market segments. For mid- and small-cap funds, selling to a larger sponsor remains a natural and often the easiest exit. At the large-cap end, however, every buyer is already contemplating its own exit, and many assets have already passed through several rounds of private equity ownership. The authors argue that this leaves two realistic exits: a strategic buyer or an IPO. Continuation vehicles and "private IPOs" rarely deliver the liquidity LPs expect, and in Europe the IPO route remains unattractive given uncertain valuations and investor demand. Without a reliable IPO exit, large-cap buyers either lower their bids or withdraw, widening the gap between seller expectations and buyer prices. Until European equity capital markets recover, the authors regard the strategic buyer as the most credible counterparty for large assets.

Corporates do not win every auction. Sponsors remain better owners of businesses requiring restructuring in strategy, capital structure or operations. For mature assets, however, corporates can offer synergies, market access and strategic fit. Financing also favours them: investment-grade corporates can generally borrow more cheaply in bond and bank markets than sponsors can in leveraged loan and high-yield markets, and can combine cash, existing facilities and equity. The authors say this flexibility is a real edge while rates remain high.

The firm contends that corporate demand is structural rather than cyclical, as European companies increasingly view scale as essential to competing with US and Chinese rivals, and the political case for European champions points to sustained interest.

The authors advise sponsors to factor the strategic exit into investment decisions from the outset. Key questions include identifying likely corporate buyers, assessing how those buyers will view integration potential, anticipating regulatory, merger-control and foreign-investment issues, and running processes that account for the differing value and certainty assessments of corporate and sponsor bidders. The article concludes there is no standard answer to these questions.