Analysis: Private equity mega-exits become more valuable amid slow investor payouts
22/01/2025 13:00
*
Mega-exits rare but stand out amid private equity's cash
return
struggles
*
Favorable 2025 conditions could boost dealmaking,
prospects for
PE mega-exits
*
Limited buyer universe, deal size among hurdles for
mega-exits
*
Only 27 such exits out of 2,900 U.S. PE sales between
2020-24
By David French
Jan 22 (Reuters) - Calpine Corp's $16.4 billion sale to
Constellation Energy CEG.O is set to generate a handsome
windfall for the power producer's owners, but has also stoked
hopes within the private equity world that similar mega-exits
may help an industry struggling to return investor cash.
The trio of investors - Energy Capital Partners (ECP),
Canadian pension fund CPP Investments and Access Industries -
and their limited partners are expected to pocket a return of
around four times their original outlay, according to people
familiar with the matter.
Not only was the Jan. 10 agreement the largest transaction in
the U.S. power industry in nearly two decades, but the Calpine
owners are also set to reward investors holding significant
positions in their portfolios. In the case of ECP, liquidating
around a quarter of its $5 billion third flagship fund, as well
as stakes in other ECP vehicles, two of the sources said.
This type of mega-exit is rare in the buyouts world: only 27
sales worth more than $10 billion were struck between 2020 and
2024, out of almost 2,900 U.S. companies divested by private
equity in the time period, according to data provider Dealogic.
Among the few in 2024 were GTCR and Apax Partners' deal to sell
insurance brokerage AssuredPartners to Arthur J Gallagher
AJG.N for $13.45 billion, and Home Depot's HD.N $18.25
billion purchase of hardware supplier SRS Distribution from
Leonard Green & Partners and Berkshire Partners.
Such large deals are gaining greater significance, though,
amid the money management industry's struggles to offload bets
made during the boom years of the late-2010s and into the early
part of this decade, according to several private equity
investors and advisers interviewed by Reuters.
With the overall dealmaking environment expected to be
favorable in 2025, industry participants are hoping even a small
increase in such transactions could help improve the recycling
of capital and head off impatient investors.
"It's looking like 2025 is going to have a lot of the right
conditions," said John Grand, co-head of the corporate practice
at law firm Vinson & Elkins.
"Public equities feel like they are somewhat overvalued, so
people are looking for private deals. Interest rates are coming
down, and you also have political predictability for the next
few years."
GOLDILOCKS DEALS
The upbeat thinking comes after a lean couple of years for
exits. Many sale processes failed amid a disconnect in price
expectations between buyers and buyout firms wanting top dollar
for assets - often bought during the period of historically low
interest rates, when debt was cheap and valuations soared.
For the largest deals, this environment compounded the fact
they are harder to accomplish in the first place, given the
limited universe of buyers. While an initial public offering
(IPO) is an alternative, sellers can exit their investment
immediately, rather than having to hold a sizable stake in
publicly traded companies for several months or years.
"Strategics only do deals at certain times, so the stars
aligned around the Constellation deal, and we will achieve most
of the IPO upside but with reduced execution risk," said Tyler
Reeder, president and managing partner of ECP.
Pressure to reward LPs is increasingly prominent. The ratio
of exits by private equity versus new investments fell to a
record low in 2024, while at the current pace it would take
eight years for buyout firms to exit their existing U.S.
portfolios, according to data from PitchBook.
Against this backdrop, larger deals can be more efficient in
returning cash versus the time needed to execute multiple
smaller investments.
"DPI is a priority for LPs right now, so being able to
strike an all-cash deal of this magnitude is meaningful and
appreciated by investors," said Aaron Cohen, head of financial
services & technology at GTCR, of its AssuredPartners deal.
Distributions to paid-in capital (DPI) is a metric that
evaluates money managers in terms of how much cash is returned
to investors.
GTCR earned around 2.5 times its original investment made in
2019 when agreeing to sell AssuredPartners, according to a
source familiar with the matter.
Although mega-exits are highly prized, an increase in those
transactions may not be a panacea for the industry, given that
they are complicated to pull off.
"They are Goldilocks transactions," said Bill Nelson, a
partner at law firm A&O Shearman.
(Reporting by David French in New York; Additional Reporting by
Isla Binnie in New York; Editing by Matthew Lewis)
((mailto:davidj.french@thomsonreuters.com;))