Analysis: Private equity mega-exits become more valuable amid delayed investor payouts Reuters

By David French

(Reuters) – Calpine Corp’s $16.4 billion in sales Star power (NASDAQ: ) is poised to create a nice windfall for the power producer’s owners, but similar mega-exits in the private equity world have raised hopes that it could help an industry struggling to return investors’ cash.

Three of the investors – Energy Capital partners (WA:) (ECP), the Canadian pension fund CPP Investments and Access Industries – and its limited partners will pocket returns of about four times the original cost, people familiar with the matter said.

Not only is the Jan. 10 deal the largest transaction in the U.S. energy industry in two decades, but Calpine owners are also poised to reward investors with significant positions in their portfolios. As for ECP, it will liquidate a quarter of its $5 billion third flagship fund, as well as stakes in other ECP vehicles, the two sources said.

Between 2020 and 2024, only 27 sales worth more than $10 billion occurred, among the 2,900 U.S. companies that took private equity during that period, making such mega-exits rare in the market, according to data provider DeLogic.

In 2024, among the few GTCR and Apex (HN: ) Partners Agreement to Sell Insurance Broker AssuredPartners to Arthur J. Gallagher for $13.45 Billion and Home Depot (NYSE: ) $18.25 billion acquisition of hardware supplier SRS Distribution from Leonard Green & Associates and Berkshire Associates.

Such large deals are gaining in importance as the money management industry struggles to hedge against bets made in the late 2010s and early this decade, several private investors and advisers interviewed by Reuters said.

With the overall deal situation expected to be favorable by 2025, industry participants hope that even a small increase in such transactions will improve capital recycling and weed out impatient investors.

John Grand, associate head of corporate practice at the law firm Vinson & Elkins, said: “2025 looks like there are a lot of real scenarios.

“Public stocks feel somewhat overvalued, so people are looking for private deals. Interest rates are coming down, and you’ve got political projections for the next few years.”

Goldilocks offers

Good thinking comes only after a few years. Many sales processes fail when there is a breakdown in pricing between buyers and buying companies.

For larger deals, this environment is exacerbated by the fact that they are more difficult to execute in the first place given the limited universe of buyers. While an initial public offering (IPO) is an option, sellers can exit their investments instead of holding large stakes in publicly traded companies for several months or years.

“Strategies only do deals at certain times, so the stars align around a stellar deal, and we achieve most of the IPO’s upside but reduce the risk of execution,” said Tyler Reeder, president and managing partner of ECP.

The pressure to reward LPs is increasingly prominent. The exit ratio of private equity and new investments has fallen to record lows by 2024, at the current rate it will take eight years for buyout firms to exit their existing U.S. portfolios, according to data from PitchBook.

Against this background, larger deals may be more efficient in returning funds than the time required to execute many smaller investments.

Aaron Cohen, head of financial services and technology at GTCR, said of the AssuredPartners deal: “DPI is now a priority for LPs, so being able to do an all-cash deal at this size makes sense and is appreciated by investors.

Distribution per paid-in capital (DPI) is a measure by which money managers assess how much cash is returned to investors.

When AssuredPartners agreed to sell GTCR in It earned about 2.5 times its initial investment in 2019, a source familiar with the matter said.

Although mega-exits are highly regarded, an increase in those transactions may not be a panacea for the industry, as they are complex to pull off.

“They’re Goldilocks transactions,” said Bill Nelson, a partner at the law firm A&O Shearman.