Good morning, Hubsters. MK Flynn here with the Wire on a jam-packed Friday.
Congratulations! This morning, the April issue of Buyouts is out, announcing the best private equity best exits of 2021.
Francisco Partners took home the top prize of overall Deal of the Year and is the winner in the Mid-Market category for deploying its seasoned carve-out strategy to great effect with medical device maker Capsule Technologies, which FP sold to Royal Philips for $635 million.
Aaron wrote about the Capsule sale, which generated a 233 percent gross IRR and fetched roughly a 11.9x gross MOIC, according to sources familiar with the transaction.
Capsule, which had been a corporate orphan under the ownership of Qualcomm, provides patient monitoring and medical device integration at health facilities, had to pivot during the pandemic to operate remotely. The company, which Francisco acquired in 2019, also quickly transitioned to developing its technology to help medical professionals remotely monitor covid patients on ventilators without having to make close contact.
“We gave that technology away in the early days of covid to help during those tough times,” partner and deal team leader Chris Adams told Aaron. “How quickly the team was able to do this and how impactful it was to many clinicians and patients is definitely one of the parts of the story of which I am most proud.”
FP is no stranger to carve-outs, with past successes including the software group from Dell.
“A lot of what we were able to do with the business would have been hard for Qualcomm to do,” Adams said. “We divested two parts of the business, made an acquisition, brought in a CEO, all in the first six months. At FP, we specialize in tech and divisional carve-outs, and in doing so we try to get to know companies’ way before there is an opportunity to invest. Lots of our best investments were ones where we had many years of history before investing, and Quest and Capsule were no different.”
Big deal. The large market Deal of the Year goes to EQT for its sale of Aldevron to Danaher.
I wrote the profile of the deal.
When EQT acquired a majority interest in Aldevron for $3.4 billion in 2019, the Stockholm investment firm bet on the rapidly growing market for cell and gene therapies, a new category of genetic medicine aimed at treating previously incurable diseases. Less than two years after acquiring Aldevron, EQT sold it to Danaher for $9.6 billion in 2021. While EQT declined to comment on financial returns, a source familiar with the transaction said the deal represented an IRR of nearly 90 percent and a MOIC of more than 3x.
Headquartered in Fargo, North Dakota, Aldevron manufactures plasmid DNA, which is a material needed to synthesize mRNA therapies and vaccines, including the covid-19 mRNA vaccine. To help transform Aldevron from a niche supplier to a scalable manufacturer, EQT made many significant moves, including recruiting Kevin Ballinger, former president of Boston Scientific’s largest division, to serve as Aldevron’s CEO. EQT broadened the management team with a slew of new hires, including CFO. EQT also recruited a new board. Sheri McCoy (former CEO of Avon) was appointed as non-executive chairperson; and Chris Coughlin (the former CFO of Tyco and Pharmacia), Jeff Huber (founding CEO of Grail) and John Ballbach (former CEO of VWR) were appointed as directors.
Under EQT’s ownership, Aldevron invested $100 million to build a 189,000-square-foot manufacturing facility in Fargo, North Dakota. The facility opened in May 2021.
In the same month, Aldevron announced an extended collaboration to support Moderna’s covid-19 vaccine and other mRNA programs in Moderna’s pipeline. Aldevron had been working with Moderna for nearly a decade.
EQT’s strategy yielded impressive results. During the investment firm’s ownership, Aldevron’s revenues increased by 113 percent, EBITDA increased by 88 percent and employee headcount grew from 385 to 658.
While the pandemic opened up possibilities for Aldevron, it also “added significant complexities to execution,” Eric Liu, partner and co-head of EQT’s global healthcare sector team, told me. “At the height of covid, many labs were closed, and many gene therapy clinical trials were postponed, which negatively impacted demand. There was a lot of uncertainty around how things would play out. At that point, we had to decide whether to keep investing, or to pull the breaks and preserve cash. We decided to keep going, and that ultimately helped put the company in the strong position that it is in today. We were fortunate to have a world-class board of directors throughout this journey and an excellent partner in TA Associates.”
The Aldevron story underscores the importance of thematic investing and of backing market leaders, Liu said. Market leaders “tend to have more margin for error when events like covid-19 occur. Market leaders are also better positioned to attract and retain management talent.”
For more on FP and EQT and all the winners, read the full report, which was spearheaded by Chris and Karl, with contributions from Kirk, Iris, Aaron, Eamon and me.
Dealmaking down but private equity remains strong. “Global dealmaking fell to its lowest level since the start of the coronavirus pandemic as surging inflation, tougher regulation and the war in Ukraine led to a slowdown in what had been a record period of mergers and acquisitions,” Financial Times reports. “Just over $1tn worth of deals were struck in the first quarter of 2022, 23 per cent lower than the same period last year, with all continents facing a decline in M&A activity, according to Refinitiv data. Despite the slowdown, private equity groups enjoyed their strongest ever start to the year as they deployed vast cash piles accumulated during the pandemic.”
Elliott Management led the year’s two biggest PE-backed deals so far, “taking software company Citrix private alongside Vista Equity Partners for $16.5bn in January, and buying television ratings group Nielsen for $16bn in late March with Canadian group Brookfield.”
Logistics. Wind Point Partners and Oaktree Capital Management teamed up last week to buy the intermodal division of XPO Logistics for $710 million and combine it with Wind Point’s portfolio company STG to form STG Logistics, a new entity co-owned and recapitalized by the two PE firms. PE Hub spoke with STG Logistics chief executive Paul Svindland about the deal and the dealmaking opportunities in the logistics sector.
“There are still a lot of disruptions in the supply chain,” said STG Logistics CEO Paul Svindland. “The demand to move goods is greater than the supply of capacity out there.”
Read Obey’s story on the deal.
Secondaries. William Blair is building GP-led secondaries advisory services, sources told Buyouts. Blair is one of several banks and financial advisers thinking about adding secondaries capabilities.
Car Talk. And finally, I spoke with a few folks this week who are shopping for new cars and have run smack into the microchip shortage. I reached out to the folks at financial advisory firm Stout, which released its Automotive Industry Annual Update this week, for some insight on how the shortage is affecting PE-backed deals.
“This 2020-onward chip shortage supply chain bogey has been unlike any other the Tier I/II automotive supplier base has ever experienced,” David Hale, a director in Stout’s investment banking group, told me. “Chip capacity is coming onboard by the billions, but the relief couldn’t come soon enough. The most extreme supply chain chokepoint will be 2021, in my opinion. Last year was a perfect storm on the supply base given the Japanese plant fire, the Taiwan drought, and Texas freezing over. Most PE-owned auto suppliers considering a sell-side engagement immediately pre-covid have likely delayed plans 18-24 months at least.”
Here’s wishing you a happy April Fools Day, filled with laughter.