Boomerang buyouts: returning to old assets

With asset prices continuing to rise and levels of dry powder continuing to swell, the challenge to put money to work is becoming ever more difficult. Against this backdrop a number of GPs have returned to former investments. In August 2015, Oakley Capital paid £39m to shareholders in UK telecoms Daisy Group to reacquire the minority stake it had offloaded less than one year before, through the company's £494m take-private. Oakley first invested in Daisy in July 2009, the same month the company listed on the London Stock Exchange.

Oakley's rekindled attraction to Daisy seems clear; its October 2014 sale of a 13.6% interest had reportedly netted a sensational 35x gross money multiple and 71% IRR.

The public markets seem to be a popular platform for reuniting GPs with former holdings. In October 2015, two years after backing Infinis Energy's £780m IPO, Terra Firma revealed plans to fully return to the UK renewable energy company via a £555m take-private. Terra Firma's plans came as Infinis reported a 50% drop in its share price since listing in 2013.

While Infinis prepares to bid farewell to the stock exchange, EQT's Dometic was recently welcomed on the Nasdaq OMX Stockholm in a SEK 14.2bn IPO. The GP and portfolio company have a long history: EQT gave the vehicle-appliances retailer its current Dometic name when it carved it out from its Swedish parent in 2002. After handing over the business to BC Partners in 2005, the Nordic GP fetched it back in 2011; following the IPO and leaving overallotment out, EQT will still hold the reins with a 57% stake.

Side by side
During the on-and-off 13-year investment, EQT and Dometic have experienced similar growth patterns. In 2002, EQT invested via its €2bn third fund to acquire the company; then its second takeover was financed via its 2006-vintage €4.25bn fifth vehicle. The same parallel may be found with Ardian and French food ingredient provider Solina. After acquiring a majority stake via its small-cap fund family in 2008, Ardian remained a minority owner when it sold part of its holding in late 2011. Four years later, as Solina quadrupled revenues via a string of bolt-ons, the GP returned as a majority owner via its €2.8bn MidCap Buyout fund.

As an industry often stigmatised for being short-termist and profit hungry, could this recent phenomenon of returning to old assets act as a chance for private equity to show its long term commitment to assets? "Consolidation, online transformation, geographic expansion... There are many ways to change a business and trying to do it all within a single ownership period can be too much for a GP," says Fredrik Bürger, a partner at EY's operational transaction services team. "It is true that when a firm comes back, it can push through a longer development programme but my assumption is that returning is not an idea private equity usually has when exiting, even if it is always an option."

"In today's competitive market, with private equity players chasing a handful of quality assets, I wouldn't be surprised if a GP looked at this strategy," adds Bürger's colleague and EY director Oliver Staple. "But in my experience, these moves are still very rare, more an exception to the rule than anything else." According to him, dipping back into previously held assets is an equity story that is tough to sell to LPs and investment committees.

Keep it small
"When a GP contemplates returning to a former asset, we definitely need to see some strategic reason for that particular acquisition as well as a financial one," says Graeme Gunn, partner at fund-of-funds manager SL Capital Partners. "If you're buying it just to pump assets into your portfolio and because you happened to own the business in the past then that really isn't good enough for us."

Although sceptical of the strategy, Gunn believes it is justified in a number of instances, such as a GP revisiting an asset it sold to a trade buyer a few years back; under its corporate owner, the company might not necessarily have received the attention and financing it deserves. "In those cases, there can be an opportunity for the private equity fund to go back in and there is the benefit of knowing the asset and the management team. Having the information advantage helps a GP get up to speed and react faster," says Gunn.

In Gunn's experience, reunions with old assets are on the rise as deal origination becomes more complex for the private equity ranks: "There has been a general increase but not to a degree where we'd feel uncomfortable. We think it is a valid strategy so long as it is kept within around 10% of any given portfolio." However, cross that threshold and the LP stance would quickly shift, with question marks raised around the GP's sourcing model and its potential to generate dealflow outside of known assets, Gunn adds.

Some sectors do ‘ave ‘em
Gunn's unease mirrors that of EY's Bürger and Staple, who maintain there is much to be gained by companies through fresh ownership. "We've been recently working with a business that has seen three consecutive private equity backers," says Staple. "The first owner did very well, the second did poorly and the third is performing exceptionally well. Each player comes with its specific strengths and weaknesses and might extract different opportunities out of the same asset."

In spite of their scepticism, the EY duo believes the approach could be a good fit in some investment areas. "Take cyclical assets such as commodity businesses, for instance," says Staple. "With oil prices as they are, the investment thesis for these companies looks very different to just a few years ago – ie turnaround versus growth rationale. This might provide a trigger to return to former portfolio companies."

Another space where revisiting the past could prove profitable is infrastructure, Staple adds. An investor having divested an infrastructure asset several years ago could find value in recouping it a few years down the line, when the company becomes complementary to a dedicated portfolio built in the meantime.

However, regardless of whether a second chance for an old asset is the best strategy at any given time, SL's Gunn advises GPs to exercise caution: "If you go down this route and the investment doesn't work out for whatever reason, it is much easier for investors to be critical of your decision. If you're buying it because you know it better, shouldn't it be easier for you to succeed?"

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• Topics
• Investments
• GPs
• Performance
• Origination
• Top story
• Oakley Capital
• EQT
• Ardian (formerly Axa PE)
• Terra Firma
• Aberdeen Standard Investments
• EY (Ernst & Young)