September 28, 2018 / 10:54 AM / 8 months ago

Breakingviews - Buyout pass-the-parcel hands BC Partners a present

Trading information for KKR & Co is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 23, 2018

LONDON (Reuters Breakingviews) - Buyout groups often pick up each other’s scraps. Cynics argue that such pass-the-parcel deals mean the sector is out of ideas. BC Partners’ latest transaction shows that they can also be a lucrative way to exploit one of private equity’s perennial weaknesses: managers’ finite investment horizons.

Take United Group, a cable company in Serbia, Slovenia and other Southeast European countries. KKR, which invested in 2014, is selling a majority stake to BC Partners at a 2.6 billion euro enterprise value, according to people familiar with the matter. KKR’s investors have done well - its original purchase valued the company at about 1 billion euros.

Still, it’s not an obvious time to sell. The parent of United Group’s sales grew 13 percent last year, says Moody’s, and it has yet to integrate recently purchased Slovenian and Croatian TV stations. Its EBITDA margin, at around 43 percent on Moody’s 2018 forecasts, is below European cable benchmark Liberty Global’s near-48 percent, using Thomson Reuters I/B/E/S estimates.

It looks like a good deal for BC Partners. Assume United Group’s revenue grows 10 percent a year up to 2023, lower than its historic rate, and its EBITDA margin hits 48 percent. If capital spending stays at 25 percent of revenue and BC sells the group at a modest eight times forward EBITDA after five years, its internal rate of return would be 23 percent, according to Breakingviews calculations. That’s comfortably in line with traditional private equity return targets, at a time when managers are struggling to hit them.

KKR’s sale isn’t unusual. Next year, it’ll have owned United Group for five years - the average holding period for buyout groups, according to research outfit Private Equity Info. And the deal allows its investors to hang on to some upside: KKR will keep an unspecified minority stake in the group. Still, it’s a reminder that funds’ finite lives, and managers’ need to return cash to investors to raise fresh capital and charge fees, can limit their flexibility.

There are simpler solutions. Managers are starting to raise funds with holding periods of up to 15 years, double the traditional model. A recent Bain analysis found that returns are often higher due to lower fees and greater flexibility. That’s a better alternative to handing rivals an unwrapped present.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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