DD Live: The highlight reel

Private equity dealmakers are facing one of the biggest tests of their careers. The industry is grappling with a world of high interest rates, a tougher antitrust regime and investors who keep hounding them to return capital. What better time than to gather some of the top minds in the business to hear how they’re coping?

Some of the biggest names in the business sat down with Due Diligence on Tuesday to give us their thoughts, including Thoma Bravo’s Orlando Bravo, Brookfield’s Bruce Flatt, EQT’s Christian Sinding and BDT’s Byron Trott. They were joined by LionTree’s Aryeh Bourkoff, Bridgewater’s Bob Prince and the UK Competition and Markets Authority’s Sarah Cardell.

The view from the heads of several buyout shops: they’re still very much elephant hunting. Read on to hear the top highlights from Due Diligence Live, or see all of the action here.

Orlando Bravo sees the path to a $20bn tech buyout

Orlando Bravo, co-founder of Thoma Bravo, said the $131bn-in-assets group was eyeing an “arbitrage” in publicly listed software companies across the UK and Europe and saw a strong pipeline of potential deals. Underscoring Bravo’s bet on Europe: his firm recently opened an office in London.

Bravo said he expected Thoma to buy up a number of software businesses in the UK and separately predicted the technology-focused buyout firm would eventually clinch a takeover worth more than $20bn. He noted the firm was spending time looking at public tech companies that have struggled to become profitable.

The group’s appetite for dealmaking hasn’t been curbed by higher borrowing costs, but it’s changing how it’s funding takeovers. Thoma avoided taking on more than $2bn in debt when it invested in cyber security companies Ping Identity and ForgeRock because those higher interest expenses meant the leverage didn’t meaningfully increase investment returns. If anything, the debt could put companies under financial pressure.

Bravo also echoed sentiment from EQT chief Christian Sinding, who told DD’s Antoine Gara in an interview earlier this week that the firm was testing private stock sales for its portfolio companies in part because of “dysfunction” in the public markets. Recent initial public offerings have slid in value, creating a new hurdle for Private Equity Firms as they try to exit investments in the years ahead.

The UK’s CMA says to be upfront about your best and final offer 

The saga over Microsoft’s $75bn acquisition of Activision Blizzard left a bitter taste in the mouth of the CMA, which blocked and then cleared the deal.

The CMA’s chief executive Sarah Cardell on Tuesday warned advisers not to play games with the regulator, which has emerged as one of the toughest global watchdogs.

“It’s very clear to me that the restructured deal that Microsoft eventually put forward could have been tabled a lot earlier in the phase 2 process,” she told DD’s Javier Espinoza.

“If you or the companies you are advising think that there’s a solution, please come in earlier in the process. What we have seen too often is a very incremental approach where businesses and advisers hold back the best and final offer and that’s really not the right way to approach resolving our concerns.”

Brookfield’s Flatt: higher rates won’t be detrimental to our business

Bruce Flatt, CEO of Brookfield Asset Management, said interest rate increases have largely run their course. Meanwhile, financing markets for large deals, “have gotten better every month this year”, he added.

Flatt rejected the notion that private equity and real estate valuations had been hard hit by rising rates, noting that private equity buyers could still earn strong returns by bolstering the cash flows of individual businesses. Changes to interest rates, he predicted, would only have a minimal impact on overall investment outcomes.

Brookfield is seeing some compelling opportunities in the UK and continental Europe, Flatt added. The firm’s deal to buy UK wind farm operator Banks Renewables was one such example, giving Brookfield the chance to invest in what it believed was a strong business at a good valuation, but facing balance sheet pressures.

Private equity’s new borrowing binge draws scrutiny (including from itself)

For the past decade, private equity has been a relatively simple business: buy a company using cheap debt and long-term capital from investors, help improve cash flows and profitability, then turn around and sell it for a profit.

But higher interest rates are challenging this model, sapping the cash flows of many indebted businesses and complicating the ability of private equity owners to exit their investments. As a result, the industry is turning to new asset classes and complex financial engineering strategies.

“The world of investing over the next few years is going to be very different from what it was over the last 10-15 [years],” said Raj Rao, president and chief operating officer of Global Infrastructure Partners, who pointed to higher interest rates and inflation.

One way private equity firms are adapting is by borrowing through so-called net asset value loans. The financings have become an increasingly popular strategy in which groups borrow against portfolios of assets in their funds, adding an extra layer of debt to already leveraged corporate buyout investments.

“If you use NAV loans just to drive distribution and you have leverage on leverage . . . if it’s just leverage because you haven’t been able to create value and or drive exits then I’d be very wary if I was an LP,” EQT’s Sinding said at the conference. “I’ve heard of a few firms using them and they’re not the firms leading in DPI.”

(DPI, short for distributed to paid-in capital, is an industry measure of the cumulative value of distributions paid to investors in a private equity fund relative to the money invested.)

“I would guess that the correlation between DPI and NAV loans is inverse,” he said.

EQT’s Sinding sees a better way to return capital to investors than taking out loans

Sinding elaborated on his conversation with Antoine earlier this week, spelling out how private equity could circumvent the traditional IPO market with private share sales among limited partners.

The deals would in theory work similarly to an IPO. EQT would hire an investment bank to drum up orders for a potential stake sale of one of its portfolio companies.

But instead of going out to the hedge funds and mutual funds that usually constitute an order book in an IPO, the bank would focus on existing investors in the EQT fund. A deal would give some investors the chance to cash out, while others could increase their stake in the company, which would remain private.

He believes the model could work for companies such as Zooplus, the pet food retailer EQT bought with Hellman & Friedman for €3.7bn in 2021. 

EQT paid a huge premium when it completed the buyout, paying 58 times the company’s 2020 earnings before interest, tax, depreciation and amortisation.

“You never know when the right time to buy is. You know when the time to sell is,” said Sinding.

Separately, he touched on one of the hottest corners in the alternative investment space: private credit. The industry has grown rapidly as pension and sovereign wealth funds have invested in private credit vehicles from groups such as Ares, Blue Owl, Sixth Street and HPS, and they’re increasingly muscling big banks out of their business lending to private equity firms

But Sinding is sceptical.

“The private credit market hasn’t really been through a period of high interest rates and a lot of change . . . I do think there are a number of players out there that are not prepared,” he said.

The UK’s status as a top financial hub is at risk

Tracy Blackwell, CEO of the Pension Insurance Corporation, and Andy Griffiths, executive director of The Investor Forum, aren’t optimistic that reforms to help make the City of London a more appealing financial destination will have a tangible effect.

The pair joined the FT’s Helen Thomas to discuss the City’s woes, given a growing list of companies have abandoned London stock listings or are working on plans to delist their shares in favour of a destination abroad.

Both agreed that the sum total of reforms announced or considered to date would only make a difference at the margins.

One problem Blackwell highlighted was the general aversion to taking risks in the UK and she argued that the “tone from the top” needed to change.

Griffiths added that there needed to be a simpler way for companies and investors to engage with each other in the UK. Otherwise, London will continue to miss out on new business.

CVC is betting that sports are a ‘growth industry’

Private equity and credit shops are increasingly leaping into the sports investment business, which for decades has been dominated by wealthy families.

“This is fundamentally a growth industry,” said CVC managing partner Nick Clarry, who cited the streaming industry’s increasing reach to global fans.

Private equity firms have increasingly targeted European football in the past few years, including Clearlake Capital with Chelsea Football Club and Silver Lake with Manchester City.

“The concern I have in the Premier League with sovereigns buying in a big way, directly and indirectly . . . the question is competitive balance,” said Steve Pagliuca, who runs PagsGroup and co-owns the Boston Celtics basketball team. “Can you compete over the long term if you don’t have those deep, deep pockets?”

That’s not to say he’s not interested in playing ball. “At the right price I think some Premier League assets will be interesting,” said Pagliuca, as well as lower-tier clubs with the potential to be built up.

Clarry added that he was “absolutely” interested in exploring deals in Italy’s Serie A and Germany’s Bundesliga.

The turbulent and shortlived breakaway European Super League serves as a reminder that investing in “the world’s current pyramid is in the long- term interest of players and fans”, he added.

Infrastructure funds see a slew of deals as governments target net zero emissions

Infrastructure’s rapid growth over the past two decades is showing no signs of slowing as investors position themselves to play a leading role alongside governments in financing the transition to net zero.

“Infrastructure investment is going to be a key driver of dealmaking as governments need it and want it, but they don’t have the cash to achieve all the goals and targets they have set up,” said Tara Davies, KKR’s co-head of European infrastructure. “Private capital sees itself as part of the solution.”

Job moves

• Todd Leland, president of Goldman Sachs’ international unit and a member of the bank’s powerful management committee, will retire at the end of the year and become an advisory director, according to an internal memo seen by DD.

• Crisis management firm Longacre Square Partners has appointed BlackRock’s Jessica McDougall as chair and Institutional Shareholder Services’ Heath Winter as vice-chair of its new corporate governance and shareholder engagement practice.

• KPMG will launch fresh job cuts in the UK and freeze pay for its deal advisory staff.

• Bain Capital has hired Brookfield Asset Management’s Angelo Rufino to join its special-situations unit, Bloomberg reports.

• London-based Allen & Overy partner Andy McGregor has joined Enyo Law days after A&O’s proposed merger with New York’s Shearman & Sterling was voted through.

• Kirkland & Ellis has hired senior private equity partners Ian Barratt and Sinead O’Shea from Simpson Thacher & Bartlett in London, per Financial News.

• Rolls-Royce will cut up to 2,500 jobs as part of a global restructuring by its new chief executive Tufan Erginbilgic.

Smart reads

A very Swiss scandal A $22mn alleged fraud at Julius Baer has cast a light on the opaque world of Zürich’s independent wealth advisers, the FT reports.

Help wanted A new league of specialist consultants has emerged to provide geopolitical advice as western multinationals reckon with an increasingly fragmented world, The Economist reports.

Too good to be true? Private credit returns look amazing on paper. But there is more to consider in the fine print — Alphaville crunches the numbers.

News round-up

Choice Hotels launches $10bn hostile bid for rival Wyndham (FT)

Sam Bankman-Fried’s lawyer rebuts claims of frivolous FTX spending (FT)

Goldman profits drop 36% after pullback from retail banking (FT)

Bank of America profits beat forecasts despite drag from low-yielding bonds (FT)

Activist fund targets Japan rail company with $12bn stake in Tokyo Disneyland owner (FT)

News Corp break-up would unlock $7bn in value, says activist Starboard (FT)

Ambani’s youngest son too inexperienced for board seat, proxy advisers say (FT)

UK venture capitalists explore ways to boost pension fund investment (FT)