Before Veritas Capital teamed up with activist hedge fund Elliott Management to pull off one of the biggest private equity deals of 2018, the New York buyout firm was known for its work with niche businesses such as a manufacturer of components for satellites.
But the $5.6bn buyout of Athenahealth catapulted Veritas into a higher orbit. There, it joins half a dozen once-obscure private equity players that have broken into the industry’s top tier, capable of writing large equity cheques and snatching coveted assets from the clutches of Apollo, Blackstone and KKR.
The $6.5bn takeover of analytics group Dun & Bradstreet and $4.1bn purchase of travel technology provider Travelport were sealed by buyout firms that had long focused on smaller mid-market deals, with competition for assets intensifying as investors pump billions of dollars into new PE funds, bankers and lawyers say.
The rarefied world of the biggest deals is attractive as it contains the best return prospects, according to Michael Chae, chief financial officer of the Blackstone Group. Smaller deals, in contrast, tend to have three or four groups competing and bidding prices higher.
“We think mid-market secondary buyouts have been the most crowded, competitive space where we’ve seen the most return pressure,” said Mr Chae. “Larger scale primary deals, corporate sellers, corporate partners, more complex, more operational value creation potential, we think that's where the better fishing has been.”
An increasing number of firms are angling for bigger buyouts. Siris Capital, Francisco Partners and Veritas Capital are among the firms that struck deals for more than $3.5bn each last year.
“There is a longer list of private equity firms with unused equity capital highly motivated to put that capital to work,” said Chris Ventresca, global co-head of M&A at JPMorgan. “They are more willing to utilise a significant amount of equity capital and make more sizeable bets.”
For both Siris and Veritas, Elliott Management’s private equity arm Evergreen Coast Capital was critical to clinch their largest deals. Elliott has ramped up its buyout efforts, which are often directed at companies that the firm has itself targeted as an activist. Founded by Paul Singer and known for its brash style, Elliott is raising $2bn to fund outright takeovers.
Marni Lerner, a partner at law firm Simpson Thacher, said those efforts are fuelled by cash inflows from pensions, endowments and sovereign wealth funds, as well as a $1.2tn stockpile of committed capital that has yet to be deployed.
“You see larger firms working on mid-market deals . . . and mid-market firms are looking for larger deals,” Ms Lerner said. “Fund sizes are getting bigger, which is allowing [mid-market firms] to do larger deals.”
The fundraisings have been significant. Francisco Partners, founded by former TPG principal Dipanjan Deb, raised more than $3bn for its latest fund in 2017. So did Veritas Capital, which is where chief executive Ramzi Musallam set up shop after spending part of his career working for noted investor and hospitality heir Jay Pritzker.
Both firms exceeded their previous fundraising records by more than $1bn, according to data provider Preqin. Siris Capital, founded by two former members of the mergers and acquisitions department at Goldman Sachs, is making an even bigger leap from earlier vehicles with its latest fund, also pegged above $3bn.
Technology-focused buyout group Thoma Bravo has eclipsed all three groups with a $12.6bn fund, its largest to date. The firm is looking at clinching its biggest takeover, approaching US cyber security maker Symantec about a potential deal, which would rank among the biggest buyouts since the crisis if completed.
Chinh Chu’s CC Capital has taken a different approach to raising cash, floating “blank cheque” companies on the stock market, rather than by raising traditional funds.
Mr Chu purchased Dun & Bradstreet alongside an investor consortium earlier this year. The group, founded by the former Blackstone dealmaker, has trained its sights on deals between $2bn and $15bn, said a person familiar with the matter.
Some buyout firms have also punched above their weight by tapping favoured investors for top-up capital to invest alongside their main funds. These “co-investments” are attractive for pension and sovereign wealth funds, because they are usually exempt from the private equity firm’s fees, which can amount to 1.5 per cent a year of the amount invested and 20 per cent of any profits.
When Francisco Partners paid $3.6bn last year for Verifone, the payments company, it turned to the Canadian pension fund British Columbia Investment Management Corporation to help fund the deal.
In interviews with the Financial Times, executives from several firms were keen to emphasise common themes between their most recent deals and the far smaller transactions from which they earned their stripes with investors.
“There is not much difference between a $500m transaction and a $3bn transaction, other than transaction size,” said Mr Deb, chief executive of Francisco Partners. “You still have to pursue [the] same steps in diligence and deal process.”
Mr Musallam of Veritas said his team was “consistent” in its approach even if the targets’ size was changing. “We don’t want a far-flung enterprise where our intellectual property becomes . . . dissipated across a broader base [of industries].”
Sharp increases in private equity deal size can ring alarm bells with investors stung by their experiences with groups such as Candover, which expanded its ambitions dramatically in the years before the financial crisis only to topple when deals soured and financing dried up.
But bankers and others who invest big pension funds on their investments say investment opportunities are so scarce, and the competition to sign up to funds so intense, that they have little choice but to go along with sponsors’ plans. Lacklustre performance from other alternative investors, notably hedge funds, has propelled the shift into private equity.
The flood of capital is also contributing to higher asset valuations, forcing private equity managers to pay as much as 11 to 12 times earnings before interest, tax, depreciation and amortisation for a company, higher even than the inflated prices at the previous market peak in 2007. “Everything is priced to perfection,” one leveraged finance veteran said. “There is not much room for error, or a market downturn.”
But investors are not “indiscriminately throwing money” at every mid-market private equity group seeking to raise fresh capital, said Max Justicz, head of financial sponsors for the Americas at UBS. “We are certainly seeing some signs that the new generation of leadership at some of these firms are willing to take more sizeable or concentrated investments.”
“[Investors] are extremely focused on performance and are giving the top-quartile PE firms considerably larger new fund size if they seek it,” he said.
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