Hellman & Friedman’s PPD shows PE growth in action

PPD's value has grown more than 288 percent since H&F and Carlyle backed the company in December 2011, with its IPO assigning it an initial enterprise value of ~$14bn.

Pharmaceutical Product Development, which provides contract research services companies to pharma and biotech companies worldwide, has returned to the public markets. Its IPO, on Thursday, February 6, came eight-plus years after Hellman & Friedman and Carlyle completed its leveraged buyout of the company.

The result? PPD’s IPO assigned it an initial enterprise value close to $14 billion, up from the $3.6 valuation at which it was valued in its December 2011 take-private transaction. When H&F and Carlyle recapped the company in April 2017 – adding Abu Dhabi Investment Authority and a GIC affiliate as investors – it brought PPD’s valuation to $9.05 billion.

PPD is not only noteworthy being that it’s one of few PE-backed healthcare companies to IPO these days – and not to mention, among the largest IPOs of 2020 this year so far. Some will say there’s a bigger private equity story worth discussing.

Critics of the private equity industry contend it’s a world built around financial engineering, slapping a whole bunch of stuff together and stripping companies of their wealth. Senator Elizabeth Warren of Massachusetts last summer likened PE to “vampires – bleeding the company dry and walking away enriched even as the company succumbs.”

The PPD story negates that narrative, one source familiar with PPD told me this week. Under its nearly decade of private equity backing, PPD saw a massive increase in value – not because it was ripped apart – but because the company has actually performed well and grown steadily and immensely.

Simply put: PPD has come a long way since being founded as a one-person consulting firm in 1985 by Fred Eshelman. Its financials reflect that in more recent years. Adjusted Ebitda grew to $751.8 million in 2018, a 60 percent increase from 2014.

Leadership capabilities proved a valuable growth driver at PPD. Shortly after the H&F-Carlyle take-private, David Simmons – who was in the succession race to be CEO of Pfizer at the time, the source said – chose to join PPD, a significantly smaller company at the time. Under Simmon’s leadership, PPD’s workforce has more than doubled to around 23,000 across 46 countries today.

For H&F, PPD is also emblematic of the buyout firm’s playbook. Consistent with a broader trend in private equity, the San Francisco-headquartered firm is playing the long game.

H&F, PPD’s largest PE owner, followed by Carlyle, did not sell any shares in the IPO. The firm has continued to push the envelope in terms of how long it holds its best investments, proving to be extraordinarily concentrated in how few things it owns at any given time.

For example, H&F’s investment in Kronos, a provider of human capital management software, dates back more than 12 years. Its investment in Verisure dates to 2011, while both Hub International and Applied Systems date to 2013.

Although more shops are considering longer-duration strategies for their most prized assets, it’s worth noting that hold periods in general are falling. Median hold periods dropped to 4.5 years for deals exiting in 2018, compared with 5.9 years for investments sold in 2014, according to Bain & Co’s 2019 Global Private Equity Report.

Managers are considering various strategies as they look to hold their most treasured companies longer, Buyouts, a PE Hub sister publication, wrote recently.

That said, from a healthcare standpoint, 2019 did see more firms double dip in the outsourced pharma services universe in which PPD plays.

Nordic Capital and Novo Holdings A/S put more chips on the table when Astorg took a piece of eResearchTechnology. The deal valued the fast-growing clinical trial technology company at approximately $3.8 billion, PE Hub reported.

Elsewhere, Linden reinvested in Advarra while selling a majority stake to Genstar, valuing the provider of compliance-related services for research at approximately $1.8 billion, PE Hub wrote. In related activity, when Arsenal Partners handed over control of Advarra peer WIRB-Copernicus Group to Leonard Green, it retained a stake and is now a nearly decade-long investor. The transaction valued WCG at more than $3 billion, PE Hub reported.

The big picture: you don’t press the reset button if you don’t believe in the future growth of the company. Investors, small and large, are making out well in pharma services.

Action Item: Check out H&F’s latest Form ADV