The Race has started for European PE firms to join the $100bn Club!

The Race has started for European PE firms to join the $100bn Club!

By Ascanio Rossini

The race to become Europe’s first $100bn private-equity firm is accelerating as the recent fundraising boom shows. Europe’s largest investment firms, including Ardian, Partners Group and CVC Capital Partners, are closing in on $100bn in AuM after raising some of their largest-ever funds in recent years and launching new investment strategies in areas such as infrastructure, credit and real estate. Their rapid growth from single-fund PE shops to multi-strategy asset managers comes as the asset class has matured from a cottage industry 20 years ago to one attracting hundreds of billions of dollars annually from some of the world’s largest institutional investors.

Keeping Pace

The rapid growth of these firms also raises questions about whether firms are expanding their teams and building out the infrastructure sufficiently to keep pace with their growing assets. Money flooding into the asset class in Europe is concentrating in the hands of fewer firms, much like the U.S. market. New York-based Blackstone, for example, manages nearly $500bn, ranking it as the largest firm by assets.

Paris-based Ardian, established in 1996 as the captive private-equity arm of French insurance conglomerate AXA, leads the pack of European managers closing in on the $100bn mark.

Ardian now manages $82bn on behalf of its investors (more than double of what it managed in 2013), but is seeking an additional $25bn in new cash across its various investment strategies, including a flagship buyout fund and a global secondary fund, as well as vehicles focused on North American buyouts, private debt and European infrastructure.

Meanwhile, Ardian’s Swiss rival Partners Group, Europe’s largest listed private-equity firm, has turned itself into a fundraising machine after switching its investment focus a decade ago from backing private-equity funds to making direct investments. The Swiss firm now manages $78bn.

London-based CVC, the former owner of Formula One, is another candidate that could join the $100bn club, although perhaps a bit later than the others. The firm managed some $69bn in assets as of Sept. 30 after collecting €16bn in 2017 for the largest buyout fund ever raised by a European private-equity manager.

Increasing assets under management by moving into new markets means PE firms stand to enrich themselves by boosting the fees they receive from investors. Buyout shops typically make cash by taking a slice of profits from successful investments as well as by charging a 2% fee on the money they manage. The decision to move into different investment strategies has prompted a mixed reaction from some investors. Some see it as an opportunity to put large sums of money to work with a manager they know and trust; others as an excuse to increase the money they make in fees.

Increasing Staff

To keep pace with the growth in assets, many of the largest European firms are expanding into new geographies and ramping up the number of staff they employ. Partners Group for example, employs more than 1,000 executives globally; nearly double the 560 workers Ardian has on its payroll.

Investment firms, including Neuberger Berman’s Dyal Capital Partners and Goldman Sachs’ Petershill unit, buy stakes to gain a cut of the fees firms charge and the profits from their deals.

Bridgepoint, which has recently moved into credit and manages small-cap funds, became one of the first major buyout shops in Europe to strike such a deal when it sold a chunk of itself to Dyal Capital in August.

The continuing flood of capital flowing toward Europe’s buyout giants comes with a risk. Firms will have to be careful to ensure they don’t raise more money than they can prudently spend, as dry powder in Europe reached a record of €220bn as of Q4 2018, pushing asset prices up to an all-time high in 2018.

“This is the kind of environment—marked by too much money chasing too few deals – in which investors should emphasise caution” said Howard Marks (OakTree Capital co-founder).

Sources:

PE Newshttps://www.penews.com/articles/the-race-is-on-for-europes-firms-to-join-the-100-billion-club20190121

PE Insightshttps://pe-insights.org/the-race-to-be-europes-first-100bn-private-equity-firm/

FN Newshttps://www.fnlondon.com/articles/the-race-to-be-europes-first-100bn-private-equity-firm-20190122

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ALL TIME CLASSIC! KKR’s first leveraged buyout battle ($25bn). The fall of RJR Nabisco. Yes! Barbarians are really at the gate.

ALL TIME CLASSIC! KKR’s first leveraged buyout battle ($25bn).  The fall of RJR Nabisco. Yes! Barbarians are really at the gate.

Authors: Qitong Sun and Massimiliano Marchisio

Date 30 November 1988
Type of transaction Leveraged Buyout
Valuation 7.5-8.0x FY 1988 EBITDA of c. $3.1bn
Bidder KKR
Target company (sector)

Financials

RJR Nabisco (Tobacco & Food)

FY1988 Rev./EBITDA $16.9bn/$3.1bn (margin c.18.3%)

Rationale

RJR Nabisco’s operations exhibited moderate and consistent growth, required little capital investment and carried low debt levels.  All these features made it a particularly attractive LBO candidate. Though it had problems of declining ROA and falling inventory turnover, they appeared fixable.

On November 24th, 1988, the board of RJR Nabisco finally announced its acceptance of a revised proposal from KKR, with $25bn ($109 per share). KKR won the competitive process for the ownership and control of RJR Nabisco, a victory that resulted in the largest corporate control transaction in the US, opening the road for large corporate buyouts.

History of the RJR Nabisco takeover

  • 1985 – RJR Nabisco was formed in 1985 when Nabisco merged with RJ Reynolds tobacco. The CEO F.Ross Johnson, originally from Canada, was known for a risky, bold decision making process inside the boardroom.
  • 20th October 1988 – Johnson decided to take the company private and proposed a $17bn LBO. Company shares rose sharply on the news. Sherson Lehman Hutton announced they would take the company private at $75/share.
  • 26th October 1988 – KKR & Co. made an offer $20.4bn, but the deal was rejected. Salomon Brothers, Forstmann Little, Shearson Lehman Hutton, Goldman Sachs, First Boston, Merrill Lynch, Morgan Stanley, and more are all trying to get in on the action. A few days later, RJR Nabisco gave KKR confidential financial data about its operations.
  • 2nd November 1988 – KKR and RJR Nabisco tentatively agreed to join forces, but just after one day, the agreement failed. After that, RJR Nabisco upped the ante by making a $92/share offer (i.e. $20.9bn).
  • 18th November 1988 – Fist Boston put together a deal. Working with the Pritzker family in Chicago, offering between $23.8bn and $26.bn.
  • 29th November 1988 – Management offered $22.9bn, KKR offered $24bn and First Boston offered $23.38 to $26.1bn. The stock price jumped to $90.88.

30th November 1988 – Finally, the company went to KKR for $24.9bn or $109 a share. Mr Johnson received $53m from the buyout, $23m after taxes.

kkr pic1

The RJR Nabisco transaction warrants particular attention. Not only is it the largest LBO on record, but it also features a particularly wide range of sophisticated players, a complex set of innovative financial instruments, and a challenging valuation process.

Successful LBOs are generally characterized by both low business risk and moderate growth. RJR’s unlevered beta was 0.69, which means the firm was relatively insensitive to market-wide fluctuations. Although the growth rates of tobacco and food were 9.8% and 3.5% respectively, most analysts had forecast a slower long-term growth rate in both units. Together with the firm’s little capital investment requirement and low debt levels, RJR Nabisco was a particularly attractive LBO candidate.

ESCP PE-Team View

How did KKR win if its offer was low?

By traditional standards, RJR management should have won the bidding war. Its offer, $112 a share, was higher than KKR’s by nearly $700m, its cash portion of the offer (i.e. $84) was higher than KKR’s ($81), its members were all industry experts with an intimate knowledge of the company and management was on good terms with the board members. Nevertheless, when the bidding ended, traditional factors did not determine the winner. The management group lost.

Why?

Here the following factors had led to the success of KKR’s lower bid:

  • The break-up factor – KKR promised to keep the tobacco and most of the food business intact, which matched the board’s will to keep the company as intact as possible. While KKR promised to keep the tobacco and most of the food business intact, the management group planned to keep only the tobacco business. Indeed, KKR specified that it would sell only $5bn-$6bn of RJR assets in the near future, while the management group planned to sell the whole food business (estimated at $13bn).

To sum up: Better negotiations carried out by Henry Kravis and George Roberts (co-founders of KKR). The reality is the KKR kept its options open, not disclosing its long-term pans.

  • The equity factor: The board’s five person committee wanted to provide existing share-holders with an option to participate in the buyout and thus share in any future KKR profits from the transaction. The desire was to leave some portion of the company’s stock in public hands. While KKR proposed to distribute 25% of the equity in the future company to existing shareholders, the management grup offer included only 15%.

To sum up: Better terms and proposal deriving from a higher expertise in meeting boards’ requests.

  • Financing structure: Based on an analysis performed by the advisors to the board’s committee, KKR was offering $500m more equity than the management group, which again accommodated the board’s objective of maximizing current shareholders’ participation in future profits.

To sum up: Better understanding of businesses’ capital structures and again higher expertise in meeting boards’ requests.

  • Post-LBO leadership: The intensive bidding war affected all parties involved (including management, employees, communities and the bidders themselves). During the bidding period, the uncertainty was high and business was affected. In the interest of restoring stability, the board’s special committee assessed each offer in terms of its effects on RJR’s identity and culture. KKR quickly read the board’s mind and announced its plan to install J. Paul Sticht as the new CEO (vs. management which proposed Johnson to continue as CEO). For various reasons (i.e. most expensive fleet of corporate jets and poor public relation) the board associated MR. Johnson’s group with greed, lavish spending and insensitivity to employee and community needs.

To sum up: Again KKR demonstrated higher expertise vs management in meeting boards’ requests.

The board assessed each offer in terms of its effects on RJR’s identity and culture, and finally placed more preference on KKR. KKR was able to recognise that financial factors, as well as the acquiring group’s goodwill, would play a decisive role in the game.

About RJR Nabisco – was an American conglomerate, selling tobacco and food products, headquartered in the Calyon Building in Midtown Manhattan, New York City. RJR Nabisco stopped operating as a single entity in 1999; however, both RJR (as R.J. Reynolds Tobacco Company) and Nabisco (now part of Mondelēz International) still exist.

 About KKR & Co. – is a global investment firm that manages multiple alternative asset classes, including private equity (corporate buyouts, infrastructure and real estate), credit, and through its strategic partners, hedge funds. As of September 30, 2018, Assets under Management were $195 billion.

SOURCES