Foes have turned friends in the high-stakes, high-competition world of private equity (PE). It's a reminder of the industry's golden age, before the global financial crisis forced funds into a hasty retreat and back to basics.
Last month, the US$34 billion leveraged buyout (LBO) of Medline Industries represented the biggest such deal since 2007. Not only does its size make it one for the record books, it was conspicuous for the fact it had no less than three sponsors: Blackstone, Carlyle and Hellman & Friedman.
Big is beautiful
It's too early to tell whether this club deal is a one-off or a sign of things to come. What is certain is that megadeals—LBOs with a price tag upwards of US$10 billion—are back.
There were 14 mega LBOs during the gangbuster years of 2006 and 2007. Since then, up to the end of 2020, only 13 have been made. But at least four have already been recorded in 2021, including Thoma Bravo’s acquisitions of cybersecurity company Proofpoint and rental housing software provider RealPage, for US$12.3 billion and US$10.1 billion respectively, as well as Blackstone's purchase of data center operator QTS Realty Trust for US$10 billion.
This appetite for all things big is propelling deal figures to highs not seen for well over a decade. The US$172 billion in US PE activity recorded in the second quarter of this year was a cat's whisker from the record US$178 billion notched up in the second quarter of 2007, according to Mergermarket.
Checks and balances
If club deals are making a return, however, don’t be surprised when spectators start shaking their heads in frustration. After all, club deals don't exactly have a spotless reputation.
For example, Energy Future Holdings, formerly TXU, is best known for its spectacular collapse rather than being PE's biggest ever deal. After KKR, TPG Capital and Goldman Sachs Capital Partners came together in 2007 to put in a US$44.2 billion bid for the company, they levered it up with US$35.8 billion worth of debt. Then gas prices fell.
The rest, as they say, is history.
A similar fate befell Caesars Entertainment, which filed for bankruptcy in 2015 after succumbing to debts to the tune of US$24 billion around seven years after being taken private by TPG Capital and Apollo Global Management in a US$27.8 billion deal.
This time around, however, things are different. While funds are sitting on gargantuan sums of capital (hence the bumper transactions) and there is no shortage of financing available to leverage their deals, a new sense of prudence is in the air. Buyout shops know all too well what a black swan event like a pandemic can do to their portfolio holdings and are cutting bigger equity checks to give their companies more headroom.
Medline’s buyer group offered equity of US$18 billion—more than half the total deal value. For Proofpoint, Thoma Bravo wrote its largest equity check ever, contributing US$8 billion in equity or roughly 65% of the deal's value.
History does not appear to be repeating itself, then, but it is singing a familiar tune.
Biggest LBOs, 2001-2021 (YTD)
