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NEW YORK, Sep 13 (LPC) - Healthcare software company Netsmart Technologies has obtained US$2.375bn in debt financing from a group of direct lenders, according to two sources.
Golub Capital led the transaction. Blackstone also participated.
The transaction involved a dividend, according to a source.
In October 2020, Netsmart obtained a US$915m term loan B and a US$100m revolver to repay existing debt and fund an acquisition. The term loan, led by Goldman Sachs, finalized at 400bp over Libor with a 0.75% floor and an original issue discount of 99.5 cents on the dollar.
((April Joyner: +1 973 714 8647, april.joyner@lseg.com, Twitter: @aprjoy, @LPCLoans ))
(c) Copyright Refinitiv
NEW YORK, Sep 12 (LPC) - Asset manager BlackRock and private markets investment firm Partners Group have teamed up to launch a model portfolio for wealth investors that provides access to several of the firms' private credit, private equity and real assets funds.
The portfolio will include private credit, private equity and systematic funds from BlackRock, and private equity, growth equity and infrastructure funds from Partners Group, according to a press release. Investors will choose from three risk profiles to determine their allocations to each of the funds in the portfolio. The portfolio's structure enables wealth investors to access the funds through a single subscription document rather than needing documents for each underlying fund.
The partnership between BlackRock and Partners Group is one of the most recent moves among asset managers in private credit to tap new sources of capital beyond institutional investors. Several firms, including Blackstone and Oak Hill Advisors, offer interval and evergreen private credit funds that allow limited quarterly redemptions, providing some liquidity for wealth investors.
Others have teamed up to launch new products with individual investors in mind.
Among recent efforts, Apollo Global Management and State Street Global Advisors announced on Tuesday that they are teaming up to launch an exchange-traded fund that will include private credit investments. In May, investment firms KKR and Capital Group announced their partnership on a set of alternative funds targeted to wealth investors.
In its press release, BlackRock described its US wealth advisory business as a "key growth-driver" for the firm, contributing to a quarter of its 2023 revenue. It projects that managed model portfolios will double in assets under management in the next five years to become a US$10trn business.
((April Joyner: +1 973 714 8647, april.joyner@lseg.com, Twitter: @aprjoy, @LPCLoans ))
(c) Copyright Refinitiv
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Sept 12 (Reuters Breakingviews) - Private-equity dealmakers like to boast about the ways they improve companies, like supercharging growth or trimming costs. The evidence, however, suggests that buyout barons owe a large chunk of their success to rising valuation multiples instead. Since that boost seems likely to fade away, industry titans like Stephen Schwarzman’s Blackstone BX.N and Henry Kravis’s KKR KKR.N will have to work harder to keep pumping out the same level of returns.
The years of super-low interest rates and ubiquitous central-bank money printing, which followed the 2008 financial crisis and 2020 pandemic, sent stock-market valuations soaring. The median enterprise value to EBITDA multiple for the MSCI World Index .MIWO00000PUS peaked at almost 15 in 2021, compared with less than 10 in 2012, according to a McKinsey & Co. report. That phenomenon lifted returns for buyout barons, who often found themselves able to offload companies at a much higher multiple than the one they paid.
Take Carlyle CG.O and Hellman & Friedman’s ownership of Pharmaceutical Product Development, which runs clinical trials. The pair sold shares to Thermo Fisher Scientific TMO.N at a $21 billion enterprise value in 2021, or about 23 times trailing EBITDA. That compared with a roughly 13 times multiple they paid for it a decade earlier, according to Breakingviews calculations. The duo did manage to quadruple the company’s revenue to $5.9 billion during that period, but they were clearly also helped by rising markets.
It’s hardly a one-off. Consultants at Bain & Co. analysed deals struck between 2013 and 2023 to isolate the causes of any increase in a company’s enterprise value during private-equity ownership. The median contribution from rising valuation multiples was 47%, compared with 53% from revenue growth and practically nothing from increasing profitability. In other words, about half of the valuation boost that buyout barons got for their portfolio companies came from higher multiples. The proportion was even larger, at 64% and 71% respectively, in cases where dealmakers bought a division of a larger company or took a publicly-listed target private.
That should worry captains of the buyout world, like CVC Capital Partners’ CVC.AS Rob Lucas and Advent International’s David Mussafer, because a repeat of the post-2008 valuation runup seems unlikely. Central banks are cutting rates, but probably nowhere close to zero, and they’re generally still winding down bond-buying programmes that poured rocket fuel on multiples. The S&P 500 .SPX currently trades at 27 times trailing earnings, according to LSEG Datastream, compared with a 20-year median of 19, implying there’s little room for valuation upside. That means dealmakers will have to make up the difference elsewhere or accept lower returns.
The private equity industry still has a couple of tricks up its sleeve, though both are getting harder. Buyout barons have honed a strategy known as “buy-and-build”, which involves taking control of a mid-sized company and snapping up smaller rivals, exploiting the fact that tiny unlisted firms change hands at comparatively low valuations. These add-on transactions have accounted for about 60% overall U.S. private-equity deals since 2019, according to PitchBook.
The playbook allows buyout barons to manufacture their own valuation uplift, regardless of what stock markets do, because the larger bundle tends to get a higher multiple than any of the bolt-on acquisitions. One example is Vista Equity Partners's 2015 acquisition of British software group Advanced, which has scooped up smaller peers and attracted a 50% co-investment from BC Partners in 2019. LSEG’s M&A database lists 13 deals since 2016 where Advanced was the acquiror.
The problem is that this strategy typically relies on debt, as acquisitive companies need to lock in cheap and flexible funding for future deals. That is now in shorter supply and much more expensive. S&P Global, for example, last November downgraded Advanced’s credit rating to CCC. The average leverage multiple for U.S. buyout loans dipped below 6 last year from 7 the year before, according to LSEG LPC data reproduced by Bain & Co. The same consultancy estimated that, for a hypothetical buy-and-build strategy funded with debt equivalent to 7 times EBITDA, the cost of financing roughly doubled between 2020 and early 2024.
A second possible solution is for buyout barons to engineer a valuation uplift by changing the characteristics of businesses they own, for example by generating more stable revenue streams. EQT’s EQTAB.ST 2017 investment in waste-filtration business Desotec is a good example. The Nordic buyout shop turned the company into more a subscription-based business, allowing it to sell to Blackstone in 2021 for 18 times EBITDA compared with an initial acquisition multiple of 12.5, according to a person familiar with the matter.
Such transformative opportunities are rare, however. And there’s little evidence to suggest that buyout barons in general have a good track record of earning valuation-multiple windfalls by sprucing up their investments. McKinsey & Co. recently published an analysis based on StepStone data covering 2,512 deals from 2010 to 2021, which showed that the valuation multiples of private-equity owned companies rose more slowly than those of comparable public index benchmarks. The implication is that, on average, private owners didn’t add any extra juice to a market-wide re-rating that was happening anyway.
The upshot is that buyout barons can no longer count on rising markets. In fact, they are now factoring in significantly lower exit multiples when mulling possible targets, according to bankers. To replace what they’re set to lose on the valuation, then, private-equity firms will have to buckle down on boosting their companies’ profit.
Relying on cost cuts looks tricky. Public companies are increasingly focused on slashing expenses, and many businesses have already been through the private-equity wringer, and so have little fat left to cut. The other remaining lever is to boost revenue. Companies in fast-expanding sectors like software and healthcare provide an extra layer of protection since they have a better chance of growing their sales, and eventually make up any decline in the valuation multiple.
Buyout barons have a pretty good track record of upping portfolio companies’ top lines over the past decade, according to the Bain & Co. data. But they’ll have to do more than they have in the past to make up for less favourable markets. A widespread hunt for fast-growing targets, meanwhile, raises the risk of steeper bidding competition and therefore higher purchase prices. If that plays out, buyout barons could end up just swapping one valuation headache for another.
Follow @Breakingviews on X
(Editing by Neil Unmack and Streisand Neto)
((For previous columns by the author, Reuters customers can click on PROUD/ liam.proud@thomsonreuters.com ))
Keywords: GLOBAL-PRIVATEEQUITY/BREAKINGVIEWS
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
MELBOURNE, Sept 5 (Reuters Breakingviews) - How does a buyer avoid paying a huge multiple for a fast-growing company in a hot sector? A group led by Blackstone BX.N appears to have managed to do so with its agreed A$24 billion ($16.1 billion) offer on Wednesday to purchase Australia-based AirTrunk, which operates data centres for artificial intelligence developers like Microsoft MSFT.O and Amazon AMZN.O. The achievement requires borrowing some data-massaging techniques from the SPAC boom.
The target is privately-owned, mostly by Macquarie and Canada's Public Sector Pension Investment Board, so financial details are scant. The deal values AirTrunk's enterprise at some 21 times EBITDA, the Australian Financial Review reported, citing investment bankers. That would be in line with multiples for the next 12 months sported by some publicly traded rivals like Equinix EQIX.O and Digital Realty Trust DLR.N.
Trouble is, such comparisons are imperfect. The multiple assigned to Blackstone's biggest investment in Asia Pacific appears derived from run-rate EBITDA. This includes commitments from clients to do business for the next few years, per the AFR which dimisses it as "fake EBITDA".
That might be a tad harsh. All forecast earnings rely on pledges and guesswork to some extent, not least in new and rapidly expanding sectors. And Blackstone is well-placed to understand the data centre business. It has a $55 billion-worth portfolio of them and set up a joint venture last year with Digital Realty.
The distortions, though, appear to go on. Blackstone says the A$24 billion enterprise value includes not just the generally accepted components of equity and net debt, but also "capital expenditure for committed projects". This helps the sellers put a sum on the business that is twice what was expected when the sale process kicked off last year - and eight times the valuation their own 2020 purchase bestowed on it.
Such tweaks to accepted financial metrics are reminiscent of the focus on total addressable markets and optimistic multi-year growth estimates blank-cheque companies threw together to justify their purchases.
AirTrunk's success and the willingness of its clients to invest heavily in AI and data centres, ought to be a better bet - and not require similar tricks. That said, using a vanilla metric like expected 2024 earnings would spit out a purchase multiple of 87 times EBITDA, per AFR. Regardless of how confident of success, that's a hard number for any buyer to say out loud.
Follow @AntonyMCurrie on X
CONTEXT NEWS
Blackstone and the Canada Pension Plan Investment Board on Sept. 4 agreed to buy Australia-based data centre company AirTrunk.
In a statement, Blackstone said the deal has an "implied enterprise value" of more than A$24 billion ($16.1 billion), including capital expenditure for committed projects. Blackstone is the lead investor, with the CPPIB taking a 12% stake.
The duo is purchasing the business from Macquarie and Canada's Public Sector Pension Investment Board. They had bought 88% of AirTrunk in 2020, valuing the enterprise at A$3 billion.
Founder and CEO Robin Khuda, who owned most of the rest of the equity, will retain a smaller stake after the sale.
Blackstone said the deal represents its largest investment in the Asia Pacific region.
(Editing by Una Galani and Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on CURRIE/ antony.currie@thomsonreuters.com ))
Keywords: BLACKSTONE DE-DEALS/BREAKINGVIEWS (REPEAT)
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jonathan Guilford
NEW YORK, Sept 5 (Reuters Breakingviews) - The metamorphosis from “private equity” to “alternative asset management” has been lucrative. To make the transition, buyout barons followed a new north star: fees. The surprising winner, at least for now according to public investors: Ares Management ARES.N, a firm whose namesake is the Greek god of war. With further shifts underway, however, any grip on the valuation mantle is tenuous.
After Fortress Investment Group led a wave of peers onto stock exchanges in 2007, just before the global financial crisis struck, industry performance broadly underwhelmed. Blackstone BX.N, KKR KKR.N and Ares traded at about 10 times year-ahead earnings projected by analysts, according to LSEG, roughly in line with investment banks such as Morgan Stanley MS.N and a discount to larger, rival fund managers like BlackRock BLK.N and T. Rowe Price TROW.O.
Private equity leaned on lumpy earnings from buying and selling companies, property and other assets, anathema to the common desire for consistent growth. Worse, the buyout shops went public as partnerships, whose reporting and tax oddities scared away prospective backers.
They have since transformed. Starting with KKR in 2018, the firms became corporations, opening the door to a wider crop of investors. A massive shift also emphasized collecting steady income from managing money instead of carried interest, or the profit generated from investments. In 2016, management and advisory fees accounted for less than half of Blackstone’s revenue. Seven years later, the proportion surpassed 80%.
When coupled with the varied strategic approaches – for example, Blackstone aggressively courted smaller investors while Apollo Global Management APO.N merged with insurer Athene – valuation multiples increased, albeit unevenly. Ares, at nearly 28 times, trades at a 10% premium to Blackstone, and even larger ones to KKR and Apollo.
The divergence reflects valuation methodologies that prize steady income, prompting the race to turbocharge fees. Not every private equity decision maximizes the multiple, including the hefty balance sheets of KKR and Apollo. Even so, there is a clear sorting mechanism to determine which cash flows are, in fact, most advantageous. For the time being, shareholders value characteristics that favor the use of debt and going lighter on assets.
Started in 1997 with a focus on lending, Ares is prospering partly thanks to the rise of private credit. Regulation discourages banks from holding onto buyout loans and a patchy market for parceling them out to investors has increased the appeal of borrowing elsewhere. What began as a niche backing takeovers of less than $1 billion is far larger today. So-called direct lenders financed three-fifths of buyouts in 2023, a record, per consultancy McKinsey.
Money has poured in. Assets in direct lending grew to some $830 billion last year, roughly 20 times more than in 2010, research firm Preqin reckons. And since loans extended by Ares and others are tied to a floating benchmark interest rate, higher borrowing costs also help, even as they simultaneously curb private equity deals. Since late 2023, quarterly returns for private debt have outpaced those of buyouts, MSCI data show.
The benefits flow, to varying degrees, across the industry. Top shops are diversified. Blackstone has a big private credit operation; Ares raises chunky buyout funds. The composition varies, though. Blackstone’s credit and insurance segment accounts for nearly one-third of the more than $1 trillion it manages, while credit makes up nearly three-quarters of the approximately $450 billion at Ares.
Such differences add up. For example, traditional closed-end funds, which lock up money from pension plans, endowments and sovereign wealth funds for a set time vary their fee structures. In private equity, management fees typically switch on after a fund is capped. In private credit, they’re levied on capital once deployed. It means accumulating money is more important for equity, while in credit it’s finding deals. Today’s climate – in which fundraising has dipped for two consecutive years, according to Pitchbook – favors credit.
The pace of harvesting fees matters enormously for publicly traded private equity firms. Barclays analysts value Blackstone’s fee earnings, stripping out those related to performance, at a multiple of 52 times, versus just 12 times for income from investing. In 2023, Ares derived some 92% of its profit from fees, a little more than at Blackstone.
Hazards abound, however. Higher borrowing costs, for one, put companies under greater stress. Ares boss Michael Arougheti has said he expects defaults to rise. Moreover, at listed business development companies – essentially, publicly traded lending units such as subsidiary Ares Capital ARCC.O – an increasing share of interest is being paid in-kind, meaning not in cash. Among all BDCs covered by Fitch Ratings, such payments increased from less than 4% of total interest and dividend income in 2019 to 9% in the first quarter this year.
With the U.S. Federal Reserve clearly poised to lower interest rates in September, the burden should begin to ease. But such a shift invites other concerns. The current higher base rates translate into higher coupon payments for lenders, boosting their odds of beating the return thresholds promised to investors. Meanwhile, banks that backed away from leveraged loans are now creeping back, increasing competition.
The established private equity crowd is also ready for a revival. Blackstone, KKR and Apollo are back to investing their record-size war chests. This, too, benefits Ares, which lends against many of their deals. No debt investor, however, can hope to capture the potential upside of equity deals done at bargain-basement valuations at a market nadir.
Short-term payoffs from savvy dealmaking pale next to bigger changes afoot. Blackstone rocketed to an eye-popping valuation by attracting workaday wealthy investors into funds like BREIT, which targets real estate, and a non-listed BDC called BCRED. These are huge pools of capital. Ares Capital, with $25 billion of investments, is the largest public BDC, yet BCRED is twice as big. They also pump out fees; BREIT alone probably accounted for nearly a fifth of Blackstone’s total fee earnings at its peak, according to Breakingviews calculations. It is now rolling out similar products in areas such as traditional buyouts.
Elsewhere, Apollo’s decision under CEO Marc Rowan to unite with Athene has hurt its valuation. Insurance earnings, as a rule, fetch conservative multiples. Ultimately, though, investors may come to appreciate Apollo’s ability to print safer, asset-backed loans that capture a bigger piece of the credit markets.
All this has led to grandiose assessments of what’s at stake. KKR sees an $11 trillion opportunity from tapping individual investors; Blackstone has pointed to a number 8 times bigger. Ares, Apollo and KKR have all pegged private credit as a $40 trillion market.
Beyond the eye-popping numbers, there’s sharp-elbowed jockeying to seize the spoils. With so much to fight for, the top valuation spot will again be up for grabs.
(Editing by Jeffrey Goldfarb and Pranav Kiran)
((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com ))
Keywords: PRIVATE EQUITY-FINANCIALS/BREAKINGVIEWS
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