As KKR brought its Internet Brands single-asset process into syndication in early 2022, something happened that threatened to derail the entire transaction.
Russia invaded Ukraine, sending markets into turmoil at the same time that inflation was intensifying as the world continued to normalize after the covid health crisis.
In this environment of uncertainty, public markets began crashing, with its anticipated ripples into the private markets that would start eroding deal valuations.
Syndicating a large GP-led deal out to a large group of investors is never an easy prospect. But once uncertainty crept into the market and started to widen the spread between buyers and sellers, large deal syndication became nearly impossible.
Not to mention that Internet Brands was a tech asset at a time when anything with a hint of tech was starting to be eyed suspiciously, considering the high valuations such assets traded over the past few years.
But in every wobbly market, a few deals always stand out as transactions that will get done despite the gloom and doom. Last year, Internet Brands was such a deal.
Amid the market turmoil, KKR and the adviser on the process, Lazard, successfully syndicated more than $1 billion of the deal out to an investor group.
“The company was able to grow and scale tremendously under our ownership, having made a number of strategic acquisitions that positioned it for long-term success”
The deal closed with Internet Brands moved out of KKR North America Fund XI and into a $2.2 billion continuation fund, giving the firm more time and capital to continue growing the asset.
The challenge, and the success, of the process is why KKR’s Internet Brands single-asset deal is our Secondaries Deal of the Year. In a year that started out strong but eventually saw secondaries activity slow as the year progressed, a deal of this scale successfully finding completion is notable.
“The company was able to grow and scale tremendously under our ownership, having made a number of strategic acquisitions that positioned it for long-term success. As we neared the end of the investment period in one of our funds, it became clear that there were still meaningful opportunities to support the company’s organic growth and create value through additional acquisitions, which this transaction is enabling us to do,” KKR said in a statement to Buyouts.
A long journey
KKR’s secondaries journey with Internet Brands started in 2014, when the firm acquired the company for around $1.1 billion from Hellman & Friedman and JMI Equity through its eleventh fund. Internet Brands owns various consumer websites like ApartmentRatings, The Car Connection and legal focused sites Nolo and Martindale Hubbell.
Under KKR’s ownership, the company made a major add-on, acquiring WebMD in 2017 for about $2.8 billion. KKR used a different fund for the add-on, Fund XII, and so the firm held Internet Brands in two pools.
Internet Brands grew revenues and profits under KKR’s ownership by 8x, Lynn Walsh, the company’s chief development officer and general counsel, told Buyouts last year. The company completed more than 20 add-ons under KKR across its verticals, which includes health, legal, automotive and home and travel, Walsh said at the time.
Amount the continuation fund closed for
Price paid by KKR to acquire Internet Brands in 2014
Internet Brands grew revenues by that much under KKR ownership
Last year, KKR sold a minority stake in the business to Warburg Pincus, in a deal that valued Internet Brands at more than $12 billion. The minority stake sale set the valuation for the secondaries transaction. KKR also got a fairness opinion as part of the process, sources told Buyouts at the time.
Many single-asset secondaries deals rely on valuations set by traditional M&A transactions, which gives the processes market validation. Some deals that were valued by minority investments before the market turbulence had to be renegotiated. This caused delays with some large secondaries deals, with a few being put on hold until pricing stabilized, Buyouts reported.
With the minority stake sale sealed, KKR, working with Lazard, launched the secondaries, attracting two lead investors: Goldman Sachs and Partners Group.
The two leads account for just about $1 billion of the equity raise, a source says.
LPs in KKR North America Fund XI had the option to cash out of their stakes in Internet Brands, or roll or reinvest into the continuation fund. Most LPs in Fund XI, some of whom also had exposure to Internet Brands through KKR’s Fund XII, chose to cash out in the deal, the source says.
The firm then had to syndicate the deal to a larger investor group. “We worked closely with our investor relations and customized portfolio solutions team to build out the investor syndicate within a relatively short timeframe,” KKR said. “This allowed us to enter the market and execute this transaction in a critical window.”
KKR pursued the deal to better align the timeframe of the funds holding the asset. While Fund XI was coming to the end of its term, Fund XII still had time to run. The continuation fund, with its three-to-five-year fund life, was better aligned with the remaining years of Fund XII.
“We were able to align the exit horizon for our entire stake in Internet Brands and maintain meaningful exposure to the company’s continued growth,” KKR said. “We believe that Internet Brands still has a significant opportunity ahead.”