Firm: Leonard Green & Partners
Top executives: John Danhakl, Peter Nolan, Jon Sokoloff
Investment Professionals: 21
Strategy: Invests in control buyouts, as well as public debt and equity securities and other structured equity transactions
Leonard Green & Partners LP is back in the buyout game.
The Los Angeles-based firm on Jan. 13 announced its first buyout in 28 months, buying AerSale Holdings Inc., a company that buys used aircraft, in an all-equity deal valued at $250 million. Leonard Green also is investing as much as $350 million in IMS Health Inc., the publicly-traded health care technology company that TPG and CPP Investment Board agreed to buy in November for $5.2 billion, including debt. That makes the firm, which closed its fifth fund at $5.3 billion in 2007, part of the largest LBO in recent memory.
Academics might argue whether an all-equity deal, as with AerSale, technically qualifies as a leveraged buyout. Nevertheless, that Leonard Green is returning to majority-stake acquisitions, leverage or not, provides yet more evidence that the buyout market is warming again after a two-and-a-half year slump. “We expect a greater percentage of capital we deploy going forward would be in more conventional LBO fashion,” John Danhakl, managing partner, told Buyouts.
Indeed, executives point to the recovering economy, which offers improved business prospects for target companies, as well as the strength of the lending markets, which currently allow transactions to be financed with debt levels at 4x to 6x EBITDA. That marks a major rebound from the non-functioning debt markets of a year ago, when practically no financing was available for LBOs—though we’re still far from the overheated markets of 2006-2007, where financing in excess of 10x EBITDA was readily available. “One thing that created problems in the 2006-2007 time-frame was money was too easy,” Danhakl said. “If you can borrow too much, there’s a tendency to pay too much. You need a market where credit is not too easy, not too tight, and we’re kind of right there now. More rational lending imposes discipline on our industry, which is good, but there is still credit to do deals.”
Prior to AerSale, the firm’s most recent control investment dates back to September 2007, when it bought Scitor Corp., a 30-year-old provider of engineering and technology services for national security agencies.
Leonard Green’s return to buyouts comes nearly 20 years to the day after the firm’s top three executives—Managing Partners Danhakl, Peter Nolan and Jon Sokoloff—left the corporate finance department of Drexel Burnham Lambert in the wake of the high-yield-bond pioneer’s calamitous demise. Sokoloff quickly joined Leonard Green, an LBO trailblazer who in 1969 had helped establish Gibbons Green van Amerongen, one of the first LBO firms, and who was then starting his own shop. Danhakl and Nolan first landed at Donaldson Lufkin & Jenrette before joining Leonard Green in 1995 and 1997, respectively. Today the firm employs 21 investment professionals. Green died in 2002.
Over the years, the firm has kept a low profile while earning a reputation for supporting successful managers in need of capital to keep their businesses growing. A recent study, in fact, named the buyout shop the top-performing firm from 1996 through 2005 (see related fund performance table).
To achieve those results, the Leonard Green team targets well-managed companies it feels confident will increase EBITDA by 50 percent over the five years following its investment. The firm does not buy companies that are struggling or that need new management, and it has eschewed the increasingly popular “operating model,” in which firms hire former executives or government officials to help run portfolio companies. Jim Hoskins, CEO of Scitor, said executives at that company chose to sell to Leonard Green precisely because they were hands-off, a marked contrast with suitors that sought to impress the company with former generals employed as operating partners. “They said, ‘If you get in trouble, don’t look to us because we don’t know your business,’” Hoskins said. “What they were telling us is, ‘We’re buying you guys because you’ve already shown you know what you’re doing.’”
Although the Scitor deal took place more than two years ago, Leonard Green has found a way to stay active since then. Minus AerSale and the pending IMS Health investment, the firm has invested about $800 million since mid-2008 in minority equity and debt investments—deal structures the executives are adept at thanks to their banking experience at Drexel and DLJ. These deals include Leonard Green’s largest equity investment to date, a $425 million minority investment in Whole Foods Market Inc. The firm also took minority equity positions in VCA Antech Inc., a publicly-traded animal health care services company, and in Life Time Fitness Inc., a listed chain of health clubs. And it recently invested about $100 million in senior holding company notes issued by Equinox Holdings LLC, the chain of high-end fitness clubs.
In the AerSale deal, Leonard Green sees what is essentially an industrial distribution play. The company intends to buy more than $1 billion worth of used aircraft in the next five years, then lease them to second-tier airlines or break them down to sell as spare parts. The firm is backing CEO Nicolas Finazzo and COO Robert Nichols, who in 1987 co-founded a company with a similar strategy, AeroTurbine Inc, which they sold to AerCap, an Amsterdam-based company, in 2006. Prices for older airplanes are so low right now that it’s possible to buy an entire plane for the value of one of its engines. “It’s a very contrarian move right now because the airline industry is in very bad shape with both passenger and cargo carriers having more aircraft than needed, creating a surplus; so there’s an imbalance of sellers and no buyers,” Nolan said.
The IMS Health deal came about rather organically for Leonard Green. Like TPG, the firm had been tracking the growth of IMS Health over the years. The company had steadily increased its EBITDA over a decade, from $310 million in 1998 to $570 million in 2008, according to CapitalIQ (EBITDA subsequently dropped to $538 million in 2009). The firm has co-invested with TPG in the past and its professionals regularly talk with TPG executives. Toward the end of last summer, Danhakl said, Leonard Green informed TPG that if it needed any co-investors, it would like to help.
Leonard Green executives said that, along with more conventional buyouts, they will continue to do PIPEs, investments in debt securities and other non-control modes of investment when appropriate. Executives at the firm actually see their ability to do these deals as a competitive advantage over other buyout shops. They say that their shared experience at Drexel—where they helped clients raise capital through the debt and equity markets and advised them on mergers and acquisitions and other matters—taught them that volatility in the capital markets provides good investment opportunities.
“We’re still looking for market leading growth companies but we will be more compromising and flexible on structure,” Sokoloff said. “We have a history and ability to be much more flexible than many other private equity firms on the forms our investment takes.”