Private equity swaps higher-risk growth for ‘boring’ defensives with bankable core earnings

In the last 3 years, private equity giant KKR has acquired 60 companies and invested in 44 others, according to M&A database Mergr.

The most common sectors for acquisitions and investment were internet software and services (8%) and software (6%).

The past 12 months have taken an interesting turn for the investment juggernaut - targeting investments in strong cash flow businesses in the industrial, healthcare and infrastructure sectors.

Ramsay Healthcare (ASX: RHC) was the latest name to receive an unsolicited $20bn-plus takeover offer from a consortium led by KKR on Wednesday. The $88.00 a share cash offer represents a 36% premium to the company’s last close of $64.39 on Tuesday. 

Other notable (and attempted) takeovers include: 

• 19 April 2022: KKR was said to be working up a bid for Cleanaway (ASX: CWY) and “reasonably advanced in terms of first stage due diligence”, according to the Australian Financial Review

• 1 April 2022: KKR considering offers for a stake in listed German laboratory supplier Stratec, according to Reuters

• 28 March 2022: KKR nearing a deal for Spanish fertility treatment provider Ivirma, according to Bloomberg 

• 23 Dec 2021: Grid operator Spark Infrastructure (ASX: SKI) delists after a $5.2bn takeover bid (28% premium to when takeover talks began)

• 22 Nov 2021: A 33bn euro bid was launched to take Telecom Italia private

• 7 Sep 2021: Macquarie Infrastructure sells Atlantic Aviation division to KKR for US$4.475bn. Atlantic is one of the largest networks of fixed base operations in the US

Get defensive

Because who wouldn't want to get a bit defensive?

Interest rates are poised to take the elevator up, global supply chains remain constrained - two years on from the initial pandemic and inflation seems to be anything but transitory.

Defensive sectors like real estate, utilities and healthcare are arguably pockets of the market that can better weather uncertain times and continue to offer steady dividends.

The ASX is arguably a poor representation of defensive outperformance, given the lack of breadth when it comes to defensive names.

ASX 200 vs. Healthcare Index (Orange), Real Estate Index (Blue) and Utilities Index (Yellow), Source: TradingView

In the US, from a year-to-date perspective, the broader S&P 500 (-7%) has underperformed indices for healthcare (-0.6%), utilities (+7%) and real estate (-2.6%).

In these uncertain times, perhaps it would be wise to take a note for where the smart money is headed.