‘The logjam has broken’: Sponsors deal-making ramps up

Head of Financial Sponsors Malcolm Price discusses what’s behind the increase in private equity activity and how
Wells Fargo positioned itself to support 14 of the 20 biggest leveraged buyouts this year.

In recent months, deal-making in the private equity sector has increased sharply, with total deal value rising from $240 billion in the third quarter of 2024 to $331 billion in the third quarter of this year — a jump of 38%.

The spike follows a period of subdued activity when many sponsors held their portfolio companies for an average time of two years longer than usual.

Malcolm Price, head of Financial Sponsors for Wells Fargo, explains what’s behind this dynamic.

The logjam has certainly broken and there are a number of factors that are combining to cause this.

First, there is pressure from investors in sponsors, who are telling them, “We are overweight in private equity because you have performed better than some other asset classes and you have held the companies longer than normal and they have grown larger than normal.”

Head of Financial Sponsors Malcolm Price

Malcolm Price, head of Financial Sponsors for Wells Fargo, discusses increased private equity activity.

So, while the portfolio companies have gotten bigger, sponsors have not exited some of these investments, and there has been less capital returned to investors. This means that they are over-invested in private equity and won’t invest in new rounds of fundraising.At the same time, the equity market is at an all-time record high, so there is an opportunity to achieve the valuations they have expected for their portfolio companies — in many cases expectations created in the 2021 era of zero interest rates.

The IPO market has demonstrably opened, which it wasn’t for a long time, and M&A activity is also heightened. The credit markets are also at all-time tights, so it’s easier for a buyer to finance a leveraged buyout (LBO).

Last, some sponsors are exiting investments and others are on the buy-side of the same company. There are a number of large sponsor-to-sponsor deals, as well as public-to-private deals.

What are some of the key sectors experiencing the most deals?

Number one is certainly the Technology, Media & Telecom (TMT) sector. Last month, there was a $40 billion deal that saw our client Macquarie Asset Management sell Aligned Data Centers to a consortium of investors including BlackRock’s Global Infrastructure Partners. It was the largest deal ever for global data centers.

There’s also dealmaking in Energy and Power because of downstream data center demand created by AI. Data centers need copious amounts of energy, and this is an area where we’re focused across Investment Banking.

An example of this is KKR’s $10 billion acquisition of Sempra Infrastructure Partners from parent company Sempra, a leading energy firm focused on energy and transmission. They sold traditional products like liquid natural gas to raise capital to meet the expected increase in power demand and fund the creation of new grids and power generation.

Within this sponsor ecosystem, what does Wells Fargo offer to clients?

Our goal is to offer a differentiated quality of execution for sponsors, meaning if they trust us to lead the deal, they will get a better outcome from us than anyone else. Differentiated execution requires intensity, focus, and specialization within sponsors, as opposed to a commoditized approach that some of our competitors take.

There is also our scale: There are very few banks that can offer the size of credit solutions as Wells Fargo to finance large-scale deals. In addition, we are flexible and can offer direct lending as well as syndicated lending so that we can be agnostic in terms of their preferred financing structure.

This year, for instance, we’re proud to have served on 14 of the top 20 LBOs.

Are clients looking for broader capabilities in this environment?

Yes — other than LBO financing, we have a full suite of services for hedging, Global Payments and Liquidity, asset finance with the best Asset-backed loan (ABL) product team on the street, and our best-in-class Fund Finance platform to support clients from the fund-down, as well as portfolio-up, perspective. Finally, we have recently added Margin Lending as a capability, which provides leverage on public equity positions that sponsors hold so they can rapidly return capital to their investors when they take a company public.

Our goal is to offer a scaled, holistic solution to sponsor clients across anything these clients want to achieve, and we do so by delivering a one Wells Fargo approach.

How do you see the sponsor landscape evolving over the next year?

Overall activity will continue to increase, particularly the number of exits from portfolio companies. Whether the scale of new deals goes up partly depends on whether the fundraising environment continues to improve, which I would expect it to, given the capital being returned from exits. In the meantime, there is no shortage of dry powder in private equity, with some $1.1 trillion waiting to be deployed.

We are also seeing a more favorable regulatory environment from the Federal Trade Commission that could spur combination deals, as the approvals we have seen so far in this Administration have been relatively straightforward.