Bad timing, big returns

Private equity professionals are a competitive bunch. But many were likely toasting Cinven’s sale of Phadia this week as further evidence that boom-era buyouts can prove profitable.

Cinven’s €2.47 billion sale of medical diagnostics company Phadia this week has yielded a 3.5x return and an internal rate of return in excess of 30 percent. Those are good figures in any market, bull or bear. But the ability to deliver that level of return despite paying a top-of-the-market price (€1.29 billion in early 2007) will come as a boost to other managers hoping to generate decent returns from their last funds.
Guy Hands, Terra Firma’s chairman and chief investment officer, this week acknowledged in his firm’s annual report that hard work remained to bring his group’s boom-era fund back above water in the wake of the EMI debacle. But he also wrote: “The credit crunch created an untenable situation for deals done just prior to that time and hence the timing of our bid for EMI became a material factor in the success of the deal.” Indeed, a lack of available credit followed by an economic downturn put an incredible amount of pressure on businesses acquired pre-crisis (and in many cases at high valuations with heavy debt loads).
Yet Terra Firma made another acquisition just before the crisis hit, a company called Pegasus which it merged with aircraft leasing business AWAS, and that business “has gone on to be operationally very successful and continues to grow”, Hands wrote. So like Phadia, it could prove to ultimately be a profitable investment despite its poor timing. (It is also worth noting, of course, that just like Terra Firma and many other GPs, Cinven, too, has had its share of portfolio pain in recent years – for example its investments in gaming business Gala Coral and USP Hospitales in Spain).
With Phadia, Cinven principal Supra Rajagopalan had the good grace to credit the company’s previous private equity owners, PPM Capital and Triton, with laying some very solid foundations during their period of ownership. The pair streamlined the business and reduced costs, but was not in a position to steer the company to the next stage of growth.

Since the Cinven acquisition in 2007, Rajagopalan said Phadia had proven so robust, and performed so well, that the price obtained this week represented a higher multiple to earnings before interest, tax, depreciation and amortisation (EBIDTA) – 16x – than the 13x multiple at which Cinven purchased it. Cinven reduced the company’s leverage multiple from 9.5x to just over 6x during its ownership too. A spokesman said its debt never traded below 90 and was one of the top-performing senior leveraged loans during the crisis.  
“The fact it was able to deliver double-digit top-line growth throughout a global recession is testament to just how strong a business Phadia is,” Rajagopalan added.
Successful exits of peak-era deals add to the excitement surrounding the number of similar companies that have publicly listed this year. In February for example, Kinder Morgan, the subject of a $27.5 billion leveraged buyout in 2006, raised $2.86 billion when it listed. Its private equity backers – Goldman Sachs, Highstar Capital, The Carlyle Group and Riverstone Holdings – sold a 13 percent stake in the offering. Some estimates have put the corresponding return multiple at nearly 3x for the sponsors, whose remaining stake is valued at a reported $26 billion. It came a month after another successful PE-backed listing, that of TV ratings and research company Nielsen Holdings.
The moral of the story? That large, high-profile deals done during the heady days leading up to 2008 are not all doomed. High valuations, leverage, and even an economic downturn will not always prove fatal to the success of an investment. Timing and circumstances beyond a GP’s control may be setbacks, but patient, hardworking GPs that have purchased a decent asset in the first place still have excellent chances of popping champagne corks further down the line.