Full-fledged LBOs have grown rarer in the last few months, but firms continue to take minority stakes in companies.
On August 9, for example, it was announced that The Blackstone Group paid $500 million for a minority position in Stiefel Laboratories Inc., a pharmaceutical company specializing in dermatology. Stiefel will issue a new class of preferred stock to Blackstone and give the firm a seat on the company’s board of directors. The Stiefel family will retain control of the company through its majority ownership stake.
Not buying public companies outright avoids any number of headaches for buyout firms, including that of having to secure debt financing during a credit crunch. A typical PIPE (private investment in public equity) transaction, such as the Blackstone investment in Stiefel Laboratories, involves a buyout shop pumping cash into a public company for roughly 30 percent of the company’s stock, often sold at a discount, and for a seat on the company’s board of directors.
Taking minority stakes in private companies also has been a popular strategy of late. Last month, GS Capital Partners and Madrone Capital Partners agreed to make a joint $1 billion investment for a minority stake in Global Hyatt Corp., the privately held hotel giant. Each buyout shop is slated to get one seat on the hotel’s board. On Sept. 7, The Kessler Group, a Boston-based financial services firm, announced that buyout firm J.C. Flowers & Co. invested $100 million for a minority stake in the company. Also in early September, TA Associates made a minority investment in Arnhold and S. Bleichroeder Advisers LLC, a mutual fund and investment advisory firm; and Lovell Minnick Partners and The March Group teamed up to supply $35 million for a non-control stake in Leerink Swann & Co., an investment bank.
Limited partners naturally like to see general partners put money to work, although they have been known to question public-company investments in the past by buyout shops.
“I have nothing against PIPEs but the [LBO fiirms] have to have a logical explanation as to why they want to pursue such a strategy,” said Jay Fewel, senior equity investment advisor for the Oregon State Treasury. “We do have public equity managers, so we’re not looking to pay large fees in private equity through public vehicles. Having said that, in some instances PIPEs are a viable entrée into a company, particularly if you get attractive pricing.”—J.P.