As public markets become increasingly resistant to private equity advances, some big buyout firms are looking at more flexible ways of getting a foot in the door or a share in the spoils. By Robert Venes.
Last week, speculation hit the press that
It is not the first time that big names in private equity have countered the conventional take-private wisdom when dealing with the public markets. Late last year, Permira built up a 13.98% stake in UK soft drinks business
With a lock-up period of two years, Blackstone certainly has little chance to sell out of its investment early, while Permira’s lock-up period finished at the beginning of this April, with a Permira spokesperson confirming that no further action had been taken.
According to sources at other buyout firms, the two deals represent different approaches to the problems facing private equity firms that have raised record amounts of cash in the last few years and now need to put that capital to work.
“There are different strategies that you have to follow and there are different issues in buying into a PLC,” says one. “You have shareholders and stakeholders and there are times when you have no hopes of a company selling to private equity, so you have to adopt different strategies for putting your money to work, either through a joint venture or taking a minority stake.”
The source counters recent suggestions that paying premia for strategic stakes is simply a way of turning around a recent spate of failed take-privates, which saw a number of big names in the private equity industry walking away empty-handed after months of expensive due diligence and research.
“You put in the same work for buying a minority stake as in a buyout of the whole company and you can reap rewards in the same way from owning all of a £10bn company as you can from a minority share of a £30bn or £40bn company,” says the source. “This is the evolution of private equity and it is just another form of investment, rather than one working out more often or better than another.”
A spokesperson for another buyout firms argues that private equity needs to adapt to the current market but that minority stakes work better as a platform for an eventual takeover approach rather than an as an investment strategy, as they are a “long way off getting the kind of control that most feel represent what enables private equity to achieve value”.
They may also help against competitive advances in the short-term but ultimately limited partners “invest in us to take control situations,” says the spokesman.
In addition, he says, fund documentation prevents firms from simply buying a succession of minority stakes, with the majority of his peers providing for a very limited number of minority stakes in public equities and most of those with a view to influencing control or achieving control positions.
“Investors aren’t just giving out blank cheques,” adds Charlie Jacobs, an M&A and private equity partner at Linklaters, with restrictions and clarifications in fund documentation often split along geographical and deal size lines.
A spokesperson for a private equity firm agrees that providing clarification in fund documentation for these types of investments is becoming more frequent as firms become more flexible and opportunistic.
“Most of the large funds are getting more flexible on fund terms, such as stake-building in public companies,” he says. “Some firms have also included agreements to make hostile bids for public companies too [hostile bids have, for the most part, been a no-go area for buyout firms owing largely to concerns by debt providers over the lack of due diligence such an approach affords]. I think it’s a sign that as funds are becoming larger, there is more interaction between public and private equity,” he adds.
Given that many investors in private equity also invest directly in public equities themselves, there is not just a conflict of interests but also less justification for private firms’ management fees.
3i, itself a listed business since 1994, aims to avoid these problems by simply looking at a smaller bracket of public assets. Earlier this year, the firm launched a new team dedicated to investing in European quoted companies not suited to all cash take-private transactions. The team aims to apply private equity management skills to public equities, similar to PIPE (private investment in public equity) deals that have been more traditionally practiced in the US.
According to 3i, there are about €65bn of under-researched, largely illiquid small to mid-cap companies in Europe.
“The capital markets are less good at exploring new opportunities for businesses to create value or looking at changes in direction and new initiatives and strategies, which is what private equity is good at,” says Douwe Cosijn, head of investor relations at 3i.
Private equity has had to evolve as it becomes more mature, better funded and better understood by both the public and the public markets. Diversification has been an essential factor in private equity firms’ make-up to date, and now they will have to explore and master different ways and means for exploiting and accessing the global stock markets at every level.