The acquisition of Stamps.com for $6.6bn by private equity group Thoma Bravo last week saw a surprising twist in the deal documents: the absence of a traditional bank to finance the leveraged purchase.
Large debt-financed acquisitions by the private equity world have historically been backed by household names on Wall Street, institutions like JPMorgan Chase, Goldman Sachs and Bank of America.
Thoma Bravo’s private equity funds will accumulate $4bn for ownership of Stamps.com, a shipping and delivery business with $758m in revenue last year.
To get their agreement on the line, the group turned to four private lenders to provide the $2.6bn in debt financing. Ares, Blackstone and PSP Investments will provide the majority, and Thoma Bravo’s loan arm will make up the difference, according to people familiar with the matter.
The deal underscores the enormous firepower that private loan funds have amassed and how they are putting that money to work to finance larger acquisitions, according to people involved in recent deals.
Cash deposited in such funds has grown to a whopping $364bn globally, according to Preqin data, and more than $ 80 billion has been raised so far this year as low interest rates make that investors seek higher returns in private markets.
The funds are often managed by the same institutions that operate large private equity funds separately. Big names like Ares, Apollo and Blackstone could compete for an acquisition and then end up as partners in debt financing. Like Thoma Bravo in the Stamps.com deal, they could end up both a borrower and a lender, with private equity on the one hand and private credit on the other.
“It reflects the huge amount of cash on the sidelines looking for performance, along with managers increasingly trying to be involved not just in the acquisition, but in all phases of the transaction,” said Matthew Mish, a credit analyst at UBS.
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The Stamps.com deal extends a long-cultivated relationship between Ares and Thoma Bravo. Ares led one of the first $ 1 billion plus non-banking financing for the acquisition by the private equity group of the data analysis business Qlik in 2016.
These private loans have been growing in recent years. In March, lender Owl Rock and a consortium of other funds that included the private credit arm of Goldman Sachs agreed to provide a $ 2.3 billion loan to Thoma Bravo to finance its acquisition of financial services software provider Calypso Technology.
Private credit funds propose that companies are moving away from bank financing to increase confidentiality and certainty of receiving funds, along with a faster turnaround time between the agreement and obtaining the cash.
“In large private transactions like Stamps.com, companies find that scaled private equity providers like Ares offer several significant competitive advantages over using a syndicate of banks,” said Kipp deVeer, chief credit officer at Ares Management.
However, it comes at a cost and in more moderate markets, especially when there is significant demand among a broader swath of credit investors, it is generally cheaper to borrow through bonds or loans arranged by banks, according to multiple investors and bankers. .
“You pay a little [for private credit funding]”But it’s the cost of insurance,” said a banker involved in the debt syndication. “You know you can make a deal with them. You are paying for certainty. In a volatile or uncertain market, you are willing to pay that. “
The growing power of private credit funds also reflects the change in risk appetite that has seeped through financial markets since the 2008 crisis, when banks moved away from large and highly leveraged funding. The new non-bank players have increasingly emerged into the void.
Its growth raises the question of whether competition to deploy funds will increase risk in the system.
Private equity firms have already shown their willingness to push themselves to close a deal. The average purchase price of acquisitions in the fourth quarter of 2020 was 12 times earnings, according to S&P Global’s LCD, eclipsing an annual record of 11.5 times set in 2019.
The Stamps.com deal will raise the company’s debt-to-earnings ratio more than 8 times, according to people familiar with the terms, more leverage than banks regulated by the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency. comfortable guaranteeing.
Stamps.com, Thoma Bravo, Ares and Blackstone declined to comment. PSP did not respond to a request for comment.
Elizabeth Carson, an attorney for Reed Smith, said the funding involved in the Stamps.com deal was an “astonishing amount.”
“It will be very interesting when the music stops,” he said. “But given the experience of the last 18 months, I think people hope that it is not like that or think that they continue to implement [cash] until I do so they don’t lose the advantage. “
Source: Inside Voice
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