With debt financing still tough to come by, private-equity investors are teaming up with deep-pocketed corporations to find new transactions and help finance their deals.
Some of the buyout industry's biggest players — Carlyle Group, Kohlberg Kravis Roberts & Co. and Providence Equity Partners — have struck joint ventures involving energy or technology companies; the deals are global in nature.
Since arranging traditional leveraged buyouts remains difficult, the idea of teaming up with corporations does not look so bad. Moreover, many companies hope to expand revenue through acquisitions this year because organic growth is a questionable proposition. Many economies remain on a fragile footing and consumer and business spending is still anemic.
For PE firms, pairing with corporate partners is a way to mitigate risk, according to market observers. Also, the notion of PE firms teaming up with another investor is not exactly novel. Over the past 10 years some of the largest buyouts have been taken on by a team of sponsor firms.
"We're hearing more talk about corporate acquisitions, and that is engendering more discussions around joint ventures, especially where there are turnaround and breakup opportunities" that involve taking a company apart and selling pieces of it, said Jake Foley, a managing director in the financial sponsors group at Deutsche Bank.
It's a bit early in the year to declare that the new deal arrangements between strategic and financial buyers will be the top item on the merger-and-acquisition menu in a year when merger activity is expected to climb 30% from 2009 levels. One example of the new approach came last month when KKR and Premier Natural Resources LLC of Tulsa announced a joint venture to invest in natural gas and oil exploration businesses in North America.
The partnership grew out of discussions that began two years ago, according to KKR. (Premier Natural advised KKR on its investment in the Appalachian oil driller East Resources last year.)
Oil and gas exploration has been one of the industries where buyout groups and businesses have more frequently joined forces, but joint ventures are also common in the technology sector and the drug-development industry.
One of the more high-profile joint ventures involving a private-equity firm and a corporation was KKR's partnering with the German media company Bertelsmann AG in July 2009. Both are investing in music copyrights. "You're seeing more private-equity firms do joint ventures with corporations where both are interested in going after a special opportunity and bringing to the table their relative strengths," said Greg Peterson, a partner in PricewaterhouseCoopers' transaction services group. "Private-equity firms often get access to markets and relationships they currently do not have."
A joint venture can take different forms. In the more traditional arrangement, a financial sponsor and a corporation form a new entity, or "newco" in M&A parlance, in which they invest money, take ownership stakes and share in revenue and earnings generated from the venture.
Another type of joint venture has a private-equity firm and corporation forming a new fund that will be used to make the investments in businesses. The size of stakes in a joint venture can vary widely, whereas the average term for a joint venture is around seven years, Peterson said.
Brooke Coburn, who heads the U.S. growth capital team at Carlyle, said: "I would say from Carlyle's perspective there's a lot of interest in corporate joint ventures. It's a very logical evolution based on the fundamental changes in the [debt] markets. A well-crafted joint venture can bring together very complementary resources."
Carlyle is one of the most seasoned participants in joint ventures, having carried out corporate and fund-related arrangements. In February, it took the latter approach by teaming up with the Chinese conglomerate Fosun Group to co-invest $100 million into a renminbi-denominated fund that will invest in Chinese companies.
Three years ago, Carlyle was involved in a much larger joint venture with Apollo Group Inc., a Phoenix educational services company. Apollo invested $801 million in the venture, acquiring an 80.1% stake, while Carlyle committed $199 million. "What we saw in Apollo, the dominant provider of post-secondary education in the U.S., was a set of skills that could be transferred into the international market," Coburn said.
Corporations, meanwhile, often turn to financial buyers to do joint ventures so they can raise additional capital to make an acquisition. Strategic buyers are generally interested in participating in such arrangements, bankers say, for the opportunity to ultimately get control of the business they buy through a joint venture.
When it comes to finding an exit, buyout groups and corporations can together take a joint venture public. However, a common route for financial buyers to realize a return on their investment is to sell their interest to the joint venture's corporate partner or another party that is interested in buying the stake.