Apax pockets PIK profit

Early last year, many opportunistic investors were looking at buying into the debt of their own significantly undervalued assets on the secondary market, but there have been few that have actually come to see the fruits of their labour until now.

When New Look completes its highly-anticipated IPO in March, its private equity backer Apax stands to secure a million pound payout. This is not a result of the investor selling down any of its stake - the £650m expected to be raised will be used to pay down subordinated debt - but as a result of selling the PIK notes it acquired over the last year, for which it paid as little as 25p in the pound.

The potential profitability of acquiring debt in portfolio companies has long been predicted. "The secondary market can present some very interesting opportunities for purchasers, more so when the buyer is familier with the credit and may indeed already hold some exposure on its books," said Gordon Watters, managing director of Ares Capital Europe, speaking to unquote" in the middle of last year.

He continued: "In situations where the underlying credit is strong, the fact that some these companies remain highly levered and may have looser covenant controls and loan documents should not be a deterrant, as in part this is reflected in the potential discounts being offered."

Indeed, Watters' predictions have proven to be more than accurate. New Look issued £359m of PIK notes in May 2006 to pay a special dividend to shareholders, including Permira and Apax. Permira, however, is thought not to have invested in the company's debt, positioning Apax as quite the clever investor. Management, headed by chief executive Carl McPhail, also invested into the company's PIK notes.

After the IPO, New Look will have net debt of around £450m. Apax will therefore not only gain a substantial return from the secondary deal, but will continue to hold a stake in the business going forward. Given the strength of the company, Apax stands to score an effective double whammy.

Moreover, if Apax manages to complete even a limited secondary sell-down upon listing - although most doubt there is sufficient market capacity for this - the private equity firm could manage to secure a triple return.

"We saw that the asset was undervalued and we had faith in the business. The debt markets were also very illiquid at the time, so we thought it was a good opportunity to do the deal," comments Apax spokesperson Ben Harding.

This deal could be the first example of many, as several private equity firms looked to invest in the debt of their own companies during the downturn.

Bridgepoint, for example, bought £10m of the debt it used to leverage the buyout of clothes retailer Fat Face in 2008. The buyout house acquired the company in a £360m secondary buyout from Advent International in 2007, securing debt facilities from BNP Paribas.

New Look recorded a turnover of £1.3bn last year with EBITDA of £218m. It has more than 1,000 stores, 601 of which are in the UK.

 

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• Topics
• Buyouts
• Exits
• GPs
• UK / Ireland
• Apax Partners
• Permira
• PIK