Private equity as an asset class has taken off in a big way amongst institutional asset allocators over the past four decades or so, with especially the leveraged buy-outs almost coinciding with the low interest rate regime over the same period. This article traces the evolution of the competitive intensity in the private equity industry from being mercenary to begin with (many of us have enjoyed reading the much-dramatized take on the 1980’s RJR Nabisco takeover by KKR in the book Barbarians at the Gate) to a more collaborative clubbish culture now. The collaboration ranges from partnered bidding for assets to funding each other’s deals to buying assets off each other. The piece begins with a recent case that captures the many ways of collaboration:
“The Zendesk takeover is illustrative of how deep the ties can run between leading private equity firms.
The origins of the takeover go back to 2016 when Permira invited H&F to make a minority investment in a call centre technology company called Genesys, which it had bought from Alcatel-Lucent four years earlier. H&F invested $900mn in Genesys at a $3.8bn valuation, more than double Permira’s initial investment.
H&F and Permira initially studied merging Genesys with Zendesk, according to sources directly involved in the deal. When the idea did not advance, they turned to Blackstone, which helped arrange more than $4bn in debt financing that is now the largest private financing on record.
For Blackstone, it meant supporting a deal led by two of its most important customers. Blackstone Credit, the buyout firm’s $230bn in assets lending arm, is a reliable lender to both firms. It provided the majority of $1.2bn in financing for H&F’s takeover of NPD Group in October 2021 and $2.2bn in debt for Permira’s take-private of cyber security group Mimecast two months later.
H&F co-led the largest leveraged buyout of 2021 alongside Blackstone, taking control of medical supplier Medline Industries for $34bn. A year earlier, the two firms struck an equally ambitious deal to merge their combined investments in human resources IT company Ultimate Software and cloud software specialist Kronos, in a $22bn deal.
To buy Zendesk, H&F and Permira raised billions in debt against a business that generated just $80mn in profits last year, far more than what regulated banks could offer, according to three people involved in the deal.
Blackstone, which considers H&F a skilled partner for takeovers, took part in the financing, as did Apollo, which financed more than $750mn of the takeover, and counts both firms among the 25 private equity firms to which it has lent over $40bn. Famed for its ruthless tactics with debtholders, Apollo now aspires to become a go-to financier for the deals organised by competitors.
“The zero-sum game mentality of old school dealmakers that always assumed that for them to win someone had to lose is really an outdated point of view,” says an executive at one of the industry’s largest global firms. “There are so many opportunities. Today you are competing and tomorrow you will bring them in as a partner on a deal. It is the new reality.”
‘Collaborations’ in the past have led to lawsuits and settlements. A 2007 case of a $33bn LBO of HCA saw no competing bids. “Emails unearthed by lawyers showed competitors refraining from outbidding each other. “I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals,” said David Rubenstein, one of Carlyle’s founders, in an email unearthed during the litigation.”
Then the entry into financing each other’s deals:
“Investment banks, hamstrung by new regulations like the 2010 Dodd Frank Act, were curtailed from holding risky assets such as low-rated debts, which has limited their ability to finance many deals. As a result, corporations and private equity buyers have had to seek new ways of issuing debt. Blackstone, Apollo, KKR and Carlyle stepped into the void.
They bought billions of non-performing loans from banks in the US and Europe, betting that the portfolios would stabilise. As markets recovered, they shifted to originating new loans, underwriting midsized private equity takeovers that banks would not finance.”
Finally, buying off assets from each other:
“The fastest way for buyout firms to deploy their nearly $2tn in “dry powder,” or funds they have raised that have yet to be invested, is to buy companies directly from other private equity firms. A record 442 of such deals worth $62bn were struck last year, according to Refinitiv.
These deals can close in less than three months, say bankers, versus as long as nine months to acquire a public company. They can also be expedient: sellers sometimes look to quickly lock in gains and show strong returns as they raise their next fund, notes one private equity firm executive.
“A lot of times you have good companies that a sponsor owns, but they need to sell to show dollars realised for their fundraising,” says the executive.
There has also been a surge in so-called “secondary buyout transactions,” where one private equity firm sells a large stake in an existing investment to another firm at a higher valuation.
One of the industry’s earliest major deals was H&F’s 2014 sale of a $750mn minority interest in Kronos, a seller of cloud-based time sheet services, to a group of buyers led by Blackstone, that were willing to take lower governance rights and leave H&F in control of the deal.
Five years later, H&F led a deal to acquire Ultimate Software for $11bn, bringing in Blackstone and GIC, its same partners on the Kronos stake sale. Blackstone’s debt arm co-led $900mn in financing for the riskiest piece of the deal’s $3.4bn total debt package, helping to get it over the line.
The two private equity firms then merged Ultimate Software with Kronos a year later, generating billions of dollars in gains, underscoring how close relationships can get deals done.”
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