Fidelity National: Forget Megadeals. Are Club Deals Back?

The much-rumored, much-hyped buyout of Fidelity National Information Services has ballooned in size: In just one week, the value of the rumored LBO zoomed from $10 billion to a whopping $15 billion.

The private equity industry is looking for any reason to party, of course. It’s no wonder that Fidelity National has become a giddy flashpoint for potential renaissance of big-time private equity dealmaking. 2007 redux! What’s not to be excited about?

Not so fast. Fidelity National is not in the same mold as those big 2007 buyouts at all. Unlike those deals, in which a single firm typically splashed out billions of dollars, it’s going to take three big private equity firms to pay for Fidelity National: Blackstone Group, THL Partners and TPG Capital.

So take heed: The club deal, not the megadeal, is more likely to determine the future of private equity.

In many ways it will be a return to normalcy in the private equity world, which has been distorted by bubble-sized thinking for the past four years.

Club deals, remember, were popular in the private equity world between 1999 and 2006. It was a different time in private equity. Even the biggest private equity firms had modestly sized funds; they were looking for good deals and wary of writing big equity checks. Club deals were also the result of the culture of competitive private equity auctions, which drove down leverage multiples and reduced pricing on deals.

Not coincidentally, the years when club deals were popular were also the ones where private equity saw the best returns and made the biggest profits. Pay less and distribute risk – a simple solution for greater internal rates of return. Private equity firms, low on capital and rendered cautious by the crisis, are likely to increasingly seek dealmaking safety in numbers.

So let’s flip the conventional wisdom. Rather than showing the superhero strength of the private equity industry, the Fidelity National deal actually may highlight the industry’s current weakness: Plenty of cheap assets to buy, but not enough money to invest.

Many giant private equity firms, after all, have come near the tail end of the megafunds they raised in 2005 and 2006. Many firms are on starvation diets when it comes to spending; they have to worry about an increasing number of bankrupt portfolio companies and the financing markets still look strangely shaky. Fundraising has been difficult, to say the least.

Fidelity National would be the first mega-sized club deal since July 2006. The last one was the buyout of hospitals operator HCA Inc. by a coalition of Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch & Co. and founder Thomas Frist Jr.

Club deals went out of vogue in late 2006 for a very good reason: The Department of Justice started investigating them for evidence of price-fixing and collusion. The DOJ sent out letters to Kohlberg Kravis Roberts & Co., Carlyle, Clayton, Dubilier & Rice; Silver Lake Partners and Merrill Lynch.

That death of club deals created the necessary conditions for the rise of megadeals. As WSJ Deal Journal pointed out at the time, it was only months after the DOJ investigation started that a volley of mega-LBOs hit the tape: the $19 billion buyout of Hilton Hotels, the $39 billion deal for Equity Office Properties Trust and KKR’s $26 billion announcement of its proposed acquisition of First Data.

If club deals do return, they may prevent the disturbingly nonsensical trend of PE firms paying boom-time leverage multiples for companies like Silverlake’s 13-times-Ebitda price for IDC.

Club deals may have yet another benefit: they may soothe the frayed relationship between limited partners and general partners. LPs, under pressure to show some profits of their own, have been complaining about PE for years; many LPs have gone as far as micromanaging GP portfolios and doing their own due diligence on deals. Maybe that era is coming to a close.

As Primack pointed out to me, club deals are likely to open the door for another old PE tradition- LP co-investments. With both LPs and GPs under the gun to have something to show for their investments, they are likely to team up with direct investments again.

So laissez les bon temps rouler. Now, at last, everyone can get in on the party.