Deep-pocketed sovereign funds are deploying billions of dollars to get private equity takeovers across the line, helping grease the wheels of dealmaking in a year when other funding sources are drying up.
KKR & Co, EQT and Brookfield all turned to wealthy Persian Gulf countries to stump up a lot of the money for big-ticket deals in recent weeks. Sovereign wealth funds spent a record US$17.2 billion on such co-investments in the first half, up 24% from the same period last year, according to data provider Global SWF.
While teaming up on deals isn’t unusual, the amount of equity these state-backed investors are providing has jumped as buyout firms find debt more expensive. The Abu Dhabi Investment Authority is contributing at least £1 billion (US$1.3 billion) for EQT’s £4.5 billion takeover of veterinary drugmaker Dechra Pharmaceuticals Plc announced in June.
Middle East investors including sovereign funds Mubadala Investment and ADQ are fronting about £1.2 billion for Brookfield’s £2.2 billion takeover of payments processor Network International Holdings Plc, according to an analysis of regulatory filings last month. KKR is also trying to rope in ADIA for its US$25 billion bid for Telecom Italia SpA’s landline network, Bloomberg News reported last week.
“SWFs can often move very quickly, can be flexible and have large amounts of capital — they can be an extremely useful capital provider,” said Elizabeth Todd, a partner at law firm Ropes & Gray. “Where they find an asset they like, they do not feel limited to small minority investments with passive governance rights.”
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Sovereign Funds Step Up | Deep-pocketed state investors increasingly join big acquisitions
A senior executive at a top global sovereign fund said they’re encouraging buyout firms to pursue larger acquisitions even in this tight financing market. They’ve expressed their willingness to back deals with bigger equity checks to reduce the burden on the acquirer, the person said, adding that their fund has to join more of these transactions to achieve its higher private equity allocation.
In March alone, sovereign wealth funds participated in more than US$25 billion of major takeovers. Singapore’s state-owned GIC Pte and Temasek Holdings contributed US$1.8 billion for Brookfield’s A$18.7 billion (US$12.7 billion) purchase of Australian utility Origin Energy, according to an investor letter.
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The same month, ADIA joined Blackstone Inc.’s US$4.6 billion acquisition of software firm Cvent Holding Corp and teamed up with Apollo Global Management Inc on its US$8.1 billion buyout of chemical distributor Univar Solutions Inc.
The moves come as higher interest rates force private equity firms to use less borrowed money to pay for their deals, potentially reducing their returns. In many cases, they’re stumping up a lot more cash upfront with the hope they will be able to add on more debt at a later stage.
“Bank financing is less readily available,” said Todd, who works in Ropes & Gray’s private equity practice in London. “Co-investment can help bridge the gap.”
Exit Environment
Sovereign funds are hungry for more. As private equity fundraising becomes more difficult, they’re asking for guaranteed access to deal flow in return for providing capital to a new fund, according to industry participants. This extra money they provide on the side for co-investments usually has the added benefit of not being subject to management fees.
Some are going even further. Abu Dhabi’s second-biggest sovereign fund has been building up an asset management arm called Mubadala Capital, which has raised funds from third-party investors and now manages about US$20 billion. It agreed in May to expand up its operations by taking over US-based Fortress Investment Group.
Money from state-backed investors is also helping buyout firms hold onto assets longer amid a difficult environment for exits.
After Bain Capital explored a sale of Japanese HR software firm Works Human Intelligence, it ended up selling a chunk of its stake to Singapore’s GIC in March. The deal also involved Bain transferring some of its holding to a new fund and valued the company at ¥350 billion (US$2.5 billion) including debt, people with knowledge of the matter said.
James Burdett, a partner at law firm Baker & McKenzie LLP, said there’s also a lot of sovereign wealth fund money going into private equity takeovers of unlisted companies.
“We have seen some significant tickets in PE transactions taken by Middle Eastern SWFs and other institutional investors,” he said. “Sovereign investors have for some time been adopting a more active investment strategy, similar to the strategies that a number of North American pension funds have successfully implemented over recent years.”
