Carlyle Shows How Private Equity Can Find Investments In-House

(Bloomberg Gadfly) -- Private equity firms vying for their next buyout candidates should expect competition to remain rampant -- after all, they've collectively amassed almost $1 trillion to spend. But in at least one corner of the market, deal flow is slightly easier to come by. 

Carlyle Group LP's sale of a stake in money manager TCW Group Inc. shows how private equity firms can find targets right under their own noses. In this instance, Carlyle's global financial-services fund and its U.S. buyout fund are selling their stakes to Nippon Life Insurance Co. and to another Carlyle fund focused on longer-term investments.

The transaction, announced on Friday, values TCW at almost $2 billion and delivers a healthy return to investors in Carlyle's initial funds (their 2013 deal was struck at a reported valuation of $780 million). From the perspective of the long-duration fund, paying up for a company that it's familiar with versus stumping up the same valuation for a unknown alternative certainly seems to be a less-risky option. 

It's an unusual deal, but it may be repeated both at Carlyle and elsewhere as the popularity of long-duration funds grows and similar vehicles like KKR & Co.'s long-term strategic investor partnerships

While seemingly complex, these transactions aren't too different from minority stake-sale processes that private equity firms already run when seeking to bolster projected returns, often ahead of raising cash for their next fund. After testing buyer interest, firms sometimes divest only a partial stake in a business to the highest bidder (commonly another private equity fund), retaining the rest of their ownership with an eye toward capturing future profits.  The only difference here is that rather than the original fund holding on to that remaining stake, it's selling it to a separate longer-dated fund within the same firm.

One deal doesn't make a trend, of course. But recent actions show that it's becoming more acceptable for firms to hang on to their "winners" not only in long-dated funds but also in new iterations of their traditional funds. Carlyle, in fact, did this in April when its latest buyout fund purchased a stake in Pharmaceutical Product Development LLC as part of a transaction that allowed an earlier fund to cash out of its investment in the company. 

At The Deal Economy Conference on Thursday, GTCR managing director Craig Bondy said a shift in the perspective of private equity investors, known as limited partners or LPs, has begun to facilitate ongoing ownership of favored businesses:

I think you're seeing more of an appetite from LPs to say, "Hey, that's a great business, we're familiar with it through you, your management team has been running that business for a while, we're comfortable realizing some of the proceeds and reinvesting in it out of a new vehicle that has a longer duration and more capital to support the business's growth plan."

These type of fund-to-fund transactions within a private equity firm's own empire may not be suitable for all situations -- especially if strategic buyers or initial public offerings provide more lucrative alternative exits. But that will still leave plenty of cases where buyout firms need not leave their own offices to get their best deal done.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

1. One example is how Permira Holdings retained a stake in Ancestry.com after Silver Lake and GIC invested last year.

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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