REUTERS/Fred Prouser
Carlyle Group co-founder and Managing Director David Rubenstein
- Bain Capital and The Carlyle Group have teamed up to buy German light bulb maker Osram Licht for $3.8 billion in a rare instance of private equity giants co-investing together.
- In the first half of 2019 there were 107 deals with more than one private equity investor, down 57% from the same period last year.
- One of the risks of private equity firms working together on a deal is that if a company's performance dips, deliberations about how to get business back on track can be frustrating and protracted.
- To mitigate the risk of an ownership dispute, Brenda Rainey, director of Bain & Company's global private equity practice, said investors are having discussions early on about financial structure, including the length of time they will manage the company and then sell it off.
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Bain Capital and The Carlyle Group just did something that has become far less common in the world of private equity: partner with each other to clinch a large multi-billion dollar transaction.
The supervisory and managing boards of Osram Licht, a German light bulb maker, accepted the private equity firms' $3.8 billion takeover bid on Thursday, six years after it was spun off from Siemens AG.
Bain and Carlyle will split ownership equally, a spokesman for both private equity firms said.
The deal, which will give Osram a capital injection after it issued warnings to investors about a weak light market, comes at a time when private equity firms have been reticent to team up with rivals for large transactions, instead looking to their own clients for capital, including pension funds and sovereign wealth funds.
It made sense in this case, though, because Bain and Carlyle's "global network" and "deep industry knowledge" will add value to Osram, Dr. Michael Siefke, a managing director at Bain Capital, said in a statement. Both firms are experienced in the industrial technology, semiconductor and automotive industries, having supported companies such as semiconductor maker NXP, electric supplier Sansata and auto transmissions maker Allison Transmission. (Osram's main customers are car makers.)
Usually in multi-billion dollar deals, private equity firms raise capital from other sources to cover the equity check and also spread the risk. But ever since the recession took down companies once bought by as many as six or seven different firms, private equity has often reserved co-investment opportunities for limited partners with whom firms often do business.
One of the benefits of this type of deal is that it can build deeper relationships with investors, offering them a stake in a deal on a no-fee basis. It is also prevents any over-exposure clients may experience if two private equity firms they are invested in partner with each other on the same deal.
Data show there have been fewer deals backed by multiple private equity firms ever since the 2008 financial crisis, when mega-buyouts including Energy Future Holdings and Caesars Entertainment fell under the weight of huge debt loads and poor financial performance. Yet even more than a decade later, private equity firms still are not teaming up in so-called club deals.
In the first half of 2019 there were 107 deals with more than one private equity investor, down 57% from 248 multi-firm deals in the same period last year, according to Preqin. It also marked the least active half since 2001 for deals backed by multiple private equity firms.
Matthew Stopnik, managing director and co-head of US investment banking at RBC Capital, said instances when private equity firms co-own a company are now reserved for special occasions, when a company could use geographic or industry sector resources that both firms together are equipped to offer. Other times, firms might band together to make the most attractive offer in a competitive auction.
"Historically there was a size parameter that often drove it," he said, of private equity firms seeking capital from each other to cover a large equity check. "Today, I think that's probably less so the case."
Recent examples of firms working with limited partners, rather than other private equity firms, are in no short supply. On Monday, Brookfield announced a proposed $8.4 billion acquisition of railroad owner Genesee & Wyoming with the backing of its own institutional investors and the Singapore sovereign wealth fund GIC, which has helped Brookfield raise capital for other large deals in the past. Last week, Blackstone, along with the Lego founding family and Canada pension fund CPPIB, announced they will acquire Merlin Entertainments, the visitor attraction operator, in a deal valued at $7.5 billion.
One of the risks of private equity executives co-investing together is an issue of management, experts said. If a company has multiple owners and it performs poorly, deliberations about how to get business back on track can be frustrating and protracted.
To mitigate the risk of an ownership dispute, Brenda Rainey, director of Bain & Company's global private equity practice, said investors are having discussions early on about financial structure, including the length of time they will manage the company and then sell it off.
"There is a lot more thought put into governance," said Rainey, "getting alignment about what actions to take with the business post-close, who is going to take the lead with value creation, who is going to lead relationships with management. All of those are more flushed out and aligned on before the deal is signed."
Lawyers with private equity clients, meanwhile, were optimistic about deals with multiple investors occurring in 2019 and beyond, saying research data may not yet reflect the activity.
"By clubbing, private equity sponsors can do deals they might not otherwise be able to do," Richard Hall, a partner at Cravath Swaine & Moore whose clients have included large asset managers and institutional investors, told Business Insider.
"On the sell side, we are paying a lot more attention now to where the private equity funds can club up. Some of the conversations we had in 2006 we are having again."