3i and Veronis Suhler Stevenson are on course for a healthy realisation as interest pours in for portfolio company, Yellow Brick Road. Goldman Sachs and UBS are reviewing options for the business, with a sale around the €2bn area now shaping up as the most likely course of action.
CVC, Blackstone and BC Partners are among the private equity firms looking at the business, although debt market sources say that hedge funds have also expressed an interest. Cerberus and Citadel, which are increasingly active buyers in the loan market, are touted as the most likely candidates to bid against the buyout firms directly.
The emergence of a hedge fund bid for a large European company has been anticipated for some time, especially after Highfield Capital’s unsolicited approach for Circuit City in the US. Many buyout firms, monitoring the growing influence of hedge funds in their industry, have warned that the competition does not have the experience or expertise to build value at portfolio companies.
They also say that the short-term nature of hedge funds is counter-intuitive to long-term private equity investing.
The pending result on Yellow Brick Road showcases the strengths of private equity in play. The company came together in August last year as a classic buy-and-build, when 3i and Veronis combined three yellow pages businesses that they had acquired previously on separate occasions. The firms recapitalised the new group on creation, raising €1bn in debt to retire the equity.
Buyout firms are taking the initiative and setting up hedge funds of their own, but hedge funds are pursuing new areas more aggressively. Single-digit performance by hedge funds in the second half of last year helped dampen inflows after three years of strong growth, according to research from Morgan Stanley.
Promotional services agency International Financial Services London (IFSL) said that the amount of money managed by over 600 London-based hedge funds rose by 60% last year, to US$190bn.
Yellow Brick Road is also shaping up as a headliner on account of leverage. Debt market sources report that Goldman is offering staple financing at around 8x debt to Ebitda.
That has set the benchmark for other banks that are also pitching to arrange the supporting debt package. The successful completion of the SEAT refinancing would be a strong signal for the transaction.