Oct 20 (Reuters) - Private equity firms are teaming up again as they tilt at bigger targets to share equity cheques backing jumbo public to private deals, such as UK payments firm Paysafe, and spinoffs from blue-chip companies, including Akzo Nobel’s sale of its chemicals business.
Blackstone and CVC are bidding to take Paysafe private, backed by US$2.6bn of debt financing, after the successful completion of Bain Capital and Cinven’s public-to-private acquisition of German pharmaceuticals firm Stada, which was backed by €3bn of debt.
Consortia were last seen at the height of the buyout boom in 2007, as a flurry of jumbo deals built to a crescendo with a £12bn acquisition of pharmacy chain Alliance Boots, and market participants suggest that more consortia deals are on the way.
“After the crisis a lot of sponsors said they wouldn’t team up again as they felt they didn’t have as much control but there’s a general comfort with it now. The joint bid on Stada worked very well and that was a tricky, complicated deal.” said Simona Maellare, global co-head of financial sponsors coverage at UBS.
The growing size of the equity cheques now required to finance high equity valuations and enterprise values is encouraging private equity houses to work together. Bain and Cinven ploughed around €2.85bn of equity into Stada, according to research firm CreditSights.
“Deal sizes are much bigger now, partly because debt is so cheap which has inflated prices,” Maellare said. “Sponsors don’t want to put €2bn of equity into a single asset, even though they now have the cash to do that.”
The private equity community is flush with cash. As of September, it was sitting on some US$954bn of dry powder - capital available for buyouts - a record high according to data provider Preqin. Paradoxically, this is increasing the chances of sponsors joining forces to buy assets.
Private equity houses are circling several multibillion euro assets that eclipse Stada’s recent deal. Hellman & Friedman agreed to take Danish payments processor Nets private last month for US$5.3bn with the help of Singaporean sovereign wealth fund GIC and others.
Carveouts are also increasing in size. CVC and KKR have teamed up against Advent and Bain Capital for the €9bn spinoff carve-out of Dutch paints and coatings company Akzo Nobel’s chemicals business.
KKR and GIC are opposing CVC and Blackstone in the bidding for Unilever’s spreads business which is expected to fetch around £6bn and Bain Capital and Clayton, Dubilier & Rice are also looking at a joint bid.
Private equity firms are generally reluctant to commit more than a certain percentage of a fund in equity cheques to avoid concentration risk.
“You don’t really want to use more than 6% of a certain fund on one deal, largely for diversification purposes,” a managing director at a private equity firm in London said.
Blackstone is writing its equity cheque for the £3bn buyout of UK payments firm Paysafe from its US$18bn seventh fund, which is one of the largest funds ever raised, while CVC is drawing the cash from its €11bn sixth fund.
The £1bn equity cheque requires around £500m from each sponsor, which will only just be inside 6% of both Blackstone and CVC’s total fund size.
Cinven’s share of its €2.85bn equity cheque for Stada came from its €7bn sixth fund and Bain’s from its newly-raised US$9.4bn global fund and its €3.4bn European fund. Both are likely to have to have been far larger than 5%-6%.
“Even if it’s only 5% or so of one of their funds, it’s still a huge amount of money in absolute terms,” Maellare said.
Private equity firms prefer teaming up with one of their existing Limited Partners (LPs) at the initial bidding stage, rather than working with other sponsors. Large Canadian pension funds such as CPPIB and PSP Investments and sovereign wealth funds like Singapore’s GIC are co-investing to improve their returns and avoid management fees.
“All the sponsors are very sensitive as to whom they team up with. One of the big problems previously was sponsors joining the process at different times,” Maellare said.
Another difference to pre-crisis combinations is that most of the consortia only consist of two sponsors, which makes governance issues much easier to navigate, although this may change if European corporates shed larger businesses.
“I sense there are some even larger leveraged buyouts to come in the next 12 months,” a second private equity partner said. (Editing by Tessa Walsh)