PSP Upping the Dosage of Private Equity?

Benefits Canada reports, PSP part of consortium taking majority share in Italian pharmaceuticals group:

The Public Sector Pension Investment Board is joining a consortium of investors to purchase the holding company that owns the majority share of Italian pharmaceuticals group Recordati.

The consortium, which includes global private markets firm StepStone and private equity company CVC Capital Partners, is purchasing Finanziaria Industriale Mobiliare ed Immobiliare, which owns 51.8 per cent of Recordati, for a value of about $4.6 billion.

“I believe that this is great outcome for the company and its employees who will benefit greatly from having CVC as a partner,” said Andrea Recordati, chief executive officer of the company, in a press release.

“In the process of finding the best partner to take Recordati forward, it was important to find a party that would allow Recordati to remain independent, with continuity for management and employees, and accelerate its growth strategy as a leading global consolidator in the pharmaceutical industry.”

The company has an impressive rare diseases business, according to Cathrin Petty, head of health care for Europe, the Middle East and Africa at CVC, in the release. “Recordati has always been a very carefully managed, international pharma company with a broad platform of products and a strong geographical footprint in primary care.”

Kirk Falconer of PE Hub Network also reports, PSP Investments joins CVC-led acquisition of Recordati:

A consortium led by European private equity firm CVC Capital Partners has agreed to acquire a 51.8 percent interest in Recordati SpA, a Milan, Italy-based developer, maker and marketer of pharmaceuticals.

The consortium, which includes Canadian pension fund manager Public Sector Pension Investment Board (PSP Investments), will buy the majority of the company from Recordati family financial holding FIMEI. The deal is valued at about 3 billion euros (US$3.5 billion).

The acquisition is expected to close in the fourth quarter.

PRESS RELEASE

CVC Fund VII Acquires Controlling Stake in Recordati S.p.A.

June 29, 2018

CVC is pleased to announce that a consortium of funds (the “Consortium”) led by CVC Fund VII has agreed to buy the holding company that owns a majority interest in Recordati.

Chairman Alberto Recordati said “Today is an important moment in the further development of the company my grandfather founded over 90 years ago. We have found in CVC a partner who shares our vision, values and passion for the company, its employees and its role in developing and distributing healthcare around the world.”

Andrea Recordati, CEO, said “I believe that this is great outcome for the company and its employees who will benefit greatly from having CVC as a partner. In the process of finding the best partner to take Recordati forward, it was important to find a party that would allow Recordati to remain independent, with continuity for management and employees, and accelerate its growth strategy as a leading global consolidator in the pharmaceutical industry. I am very pleased to be working alongside CVC in accelerating Recordati’s global expansion. I am personally reinvesting alongside the Consortium as I believe in and support Recordati.”

Giampiero Mazza, Head of CVC Italy, said “We are honoured to be chosen by the Recordati family who have put great trust in us to continue in their role as the majority shareholder of their company. We have a great admiration for the business which we have known for over many years since Giovanni Recordati was CEO. We are excited by the opportunity to support this excellent management team, led by Andrea Recordati who we have asked to remain as CEO and who carries on the company’s legacy and provides the continuity of the business and its strategy alongside Fritz Squindo, Recordati’s Managing Director and CFO.“

Cathrin Petty, Head of EMEA Healthcare at CVC, added “Recordati has always been a very carefully managed, international pharma company with a broad platform of products and a strong geographical footprint in primary care. Over the last decade Recordati has built up a very attractive rare disease business which we look forward to expanding in addition to the core business. We hope that through our expertise and global healthcare network we will help accelerate this growth across orphan and specialty care to build a global leader in the industry.”

The transaction is structured as a fully financed acquisition by the Consortium of the family’s holding company FIMEI S.p.A for an Enterprise Value of €3.03bn. FIMEI owns 51.8% of Recordati S.p.A., implying a 100% equity value for Recordati S.p.A. of €5.86bn, equivalent to €28.00 per share.

The members of the Recordati family will receive part of the consideration in the form of a deferred and subordinated long-term debt security in the amount of €750 million. Furthermore, Andrea Recordati in his capacity as CEO will invest alongside the Consortium.

Closing of the FIMEI purchase is anticipated to take place in the last quarter of 2018 and is subject only to mandatory competition approvals. Following closing, in accordance with CONSOB rules, the Consortium will make a mandatory tender offer (“MTO”) to the remaining minority shareholders. The Consortium’s current expectation is that Recordati will remain a publicly listed company. The Recordati family requested, and the Consortium has agreed, to provide other shareholders with a full cash offer at €28.00 per share, which implies a higher economic value than the cash and deferred payment made to the Recordati family. The offer of the full price in cash to the minority shareholders in the MTO is subject to the absence of a material market correction prior to closing of the FIMEI transaction (defined as a decrease in the FTSE MIB index of more than 20%). In such an event, the Consortium intends to lower the cash offer price in the MTO, in consultation and agreement with CONSOB, to a price equivalent to the actual consideration paid to the Recordati family (taking into account the present value of the deferred payment).

Leopoldo Zambeletti and Rothschild are acting as financial advisor to CVC. Gattai, Minoli, Agostinelli & Partners together with White & Case LLP are acting as legal advisors to CVC. Facchini, Rossi are acting as tax advisor to CVC. Committed financing for the transaction is being provided by Deutsche Bank, Credit Suisse, Jefferies and Unicredit.

The Consortium led by CVC Fund VII includes PSP Investments and StepStone.

This is an excellent co-investment for PSP Investments and the consortium led by CVC Capital Partners, one of Europe's top private equity firms.

In partnering up with CVC and StepStone on this deal, PSP paid no fees (it's a co-investment) and got a stake in Recordati, an Italian pharmaceutical company that specializes in rare diseases.

Now, I know a thing or two about biotech, I trade biotech and track the holdings of top biotech hedge funds every quarter, so I know there is big money involved in tackling rare diseases.

And from the press release, it sounds like a win-win for all parties as Recordati will remain independent with continuity for management and employees, and Andrea Recordati will remain CEO and will reinvest along with the consortium on this deal to expand the company globally.

As far as PSP is concerned, it's investing in a top Italian pharmaceutical company in a deal that signals PSP is looking for more stable sources of income in its private equity portfolio.

In another recent deal,  Kirk Falconer of PE Hub Network also reports, EQT, PSP Investments in exclusive talks to acquire Azelis:

Swedish private equity firm EQT and Canadian pension fund manager PSP Investments have entered into exclusive discussions to acquire Azelis SA, a Belgian distributor of specialty chemicals and food ingredients. No financial terms were released for the deal, which is expected to close in Q4 2018. The seller is U.K. private equity firm Apax Partners, which acquired the business in 2015. Established in 2001 through a merger, Azelis serves more than 43,000 customers globally. PSP Managing Director and Head of Private Equity Simon Marc said the company is a leader in an “attractive market that has strong consolidation prospects.”

PRESS RELEASE

EQT granted exclusivity to acquire Azelis, a global distributor of specialty chemicals and food ingredients

June 19, 2018

EQT VIII, with PSP Investments as co-investor, is in exclusive discussions to acquire Azelis, a leading distributor of specialty chemicals and food ingredients with a global presence in more than 40 countries.

Azelis provides a diverse range of products and innovative services to more than 43,000 customers and 2,000 principals.

EQT VIII to support Azelis’ continued growth by leveraging EQT’s experience with buy-and-build strategies, digital capabilities and global network of industrial advisors

The EQT VIII fund (“EQT” or “EQT VIII”), in partnership with the Public Sector Pension Investment Board (“PSP Investments”) as co-investor, has been granted exclusivity to finalize the discussions to acquire Azelis (“Azelis” or “the company”) from funds advised by Apax Partners.

Azelis was established in 2001 through the merger of Novorchem (Italy) and Arnaud (France). It has since followed an active acquisition strategy to create a leading specialty chemical distribution network in Europe. Today, Azelis supports more than 43,000 customers who benefit from its application know-how and technical support and have access to a wide product portfolio from more than 2,000 specialty raw materials producers. The company has 1,800 employees and sales of around EUR 1.8 billion.

EQT will support Azelis’ continued development by providing access to both operational and financial resources and by leveraging EQT’s expertise with buy-and-build strategies. In addition, EQT will provide digital capabilities and grant the company access to a global network of industrial advisors. Azelis’ current management team, under the leadership of Dr. Hans-Joachim Müller, will continue to lead the organization.

“Azelis holds a leading position in the attractive specialty chemical distribution space,” said Bert Janssens, Partner at EQT Partners, Investment Advisor to EQT VIII. “We have been impressed by how Azelis’ management team transformed the business from a predominantly European operator to a leading global platform. EQT looks forward to working with Hans-Joachim and his team on their continued growth journey.”

“We are constantly strengthening our capabilities to serve our key suppliers (“principals”) and our diverse base of customers,” said Dr. Hans-Joachim Müller, CEO of Azelis. “We are grateful for Apax’s support over the past three years and are excited to continue our journey together with EQT.”

EQT draws on comprehensive expertise and competence in business services. Since 1994, EQT has invested in many companies within the services sector. “EQT applies a long-term, responsible and sustainable development approach, relying on a consistent industrial logic,” explained Kristiaan Nieuwenburg, Partner at EQT Partners, Investment Advisor to EQT VIII. “Azelis will benefit from this growth-focused investment philosophy, as well as our sector expertise.”

“Strong relationships with leading private equity firms are at the core of our investment strategy, and we are excited to partner with EQT for the acquisition of Azelis,” said Simon Marc, Managing Director and Head of Private Equity at PSP Investments. “Azelis is a global leader in an attractive market that has strong consolidation prospects. We are very pleased to back Azelis and its world-class management team in their next stage of growth.”

The transaction is subject to regulatory approvals and the necessary consultation with employee representatives being conducted, and is expected to close in the fourth quarter of 2018. The parties have agreed not to disclose the transaction value.

Again, PSP co-invested in this deal (no fees) in a leading company in the specialty chemical and distribution space, an area that is less cyclical in nature (less impacted by a recession) and growing nicely.

Simon Marc, PSP's Head of Private Equity, explicitly states: “Strong relationships with leading private equity firms are at the core of our investment strategy, and we are excited to partner with EQT for the acquisition of Azelis. Azelis is a global leader in an attractive market that has strong consolidation prospects. We are very pleased to back Azelis and its world-class management team in their next stage of growth.”

Why am I am bringing this up? Because PSP has been ramping up its co-investments in private equity to lower overall fees and improve performance.

In fact, Kirk flaconer of PE Hub Network reports, PSP Investments deploys $4.4 bln last year, as PE strategy bears fruit:

Public Sector Pension Investment Board, Canada’s fourth largest pension system, is seeing the benefits of a three-year strategy that changed the way it invests in private equity and infrastructure, in part by doing more direct deals.

PSP Investments last week issued its report for fiscal 2018, ended in March, which shows PE deployments of $4.4 billion last year. Of the total, more than half went to co-sponsorships and co-investments.

Dealmaking was mostly in the United States and Europe, engaging such companies as ceramic-products supplier CeramTec, medical-lab-services operator Cerba, and early-childhood educator Learning Care.

The activity marks a third year of unprecedented PE outlays, totalling $9.9 billion since 2015.

The portfolio finished the year with $19.4 billion in assets, up 22 percent from fiscal 2017. Direct deals account for 51 percent of assets, up from 40 percent three years earlier.

PSP was just as active in the infrastructure space in fiscal 2018, deploying $3.3 billion, two-thirds of it on a direct basis. Portfolio assets increased to $15 billion, up 35 percent from a year ago.

Combined PE and infrastructure assets, standing at $34.4 billion, are double what they were in 2015, when both asset classes were under-allocated.

As PE Hub Canada reported last month, it was then PSP decided to overhaul its private-markets operation by ramping up both internal resources and external relationships.

Guthrie Stewart, senior vice president and global head of private investments, who spearheaded the initiative, told PE Hub Canada PSP has met its objective.

“PSP’s revamped strategy has been all about building scale and generating returns,” Stewart said. “We’ve achieved that.”

PE investments realized a one-year return of 12.9 percent in fiscal 2018, the report shows. While this is shy of the portfolio’s 17.6 percent benchmark, it improves on fiscal 2017’s 3.4 percent loss, which PSP attributed to legacy assets.

Stewart said enhanced performance owes to investing over the past three years, which generated a return “above 20 percent.” Direct deals have been a key driver, accounting for a return in the “mid-20s,” he added.

The infrastructure portfolio realized a one-year return of 19.3 percent, beating its 12.1 percent benchmark.

PSP, which manages the retirement savings of federal public employees, including defence forces and the Royal Canadian Mounted Police, earned an overall one-year return of 9.8 percent in fiscal 2018. That helped lift total net assets to $153 billion from a previous $135.6 billion.

PSP’s private-markets operation is now at a “cruising speed of investing $4 billion to $5 billion per year,” Stewart said. That’s a “good position to be in,” he noted, as it allows PSP to be “highly selective in our priorities.”

It perhaps also shows good timing, considering increased market frothiness and high leverage levels.

In this environment, PSP plans to hold dry powder so it can “pounce” on compelling opportunities as they emerge, especially in the event of a downturn, Stewart said.

I've already discussed why PSP is ramping up direct deals (ie. co-investments). It makes sense given its size and growing fast to invest in funds and co-invest alongside them to lower overall fees.

PSP's private equity portfolio finished the year with $19.4 billion in assets, up 22 percent from fiscal 2017 and direct deals account for 51 percent of assets, up from 40 percent three years earlier.

That basically means PSP's private equity team is executing very nicely on its strategy to ramp up co-investments which is why when I covered PSP's fiscal year 2018 results, I wasn't too concerned that PSP's Private Equity portfolio underperformed its benchmark over the fiscal year.

Importantly, as PSP continues to ramp up co-investments in private equity, it will be able to scale into the asset class more effectively, lower overall fees, and improve returns over the long run.

As far as dry powder, PSP has plenty of it to pounce on deals. Private equity is frothy, more and more deals are being done in public markets which is a yellow flag warning of a downturn ahead. Pension funds are taking aim at leverage and the industry's diversity problem.

In this comment, I am providing evidence that PSP is derisking its private equity portfolio, making it less cyclical, all while it continues to ramp up co-investments to scale into the asset class, maintaining its target allocation and improving overall returns over the long run.

PSP is basically following in the footsteps of CPPIB and others who are doing the exact same thing. Ramping up direct investments (co-investments with solid partners) is an intelligent way of scaling into private equity and improving long-term results.

Below, a more critical view on co-investments from Georges Sudarskis and Andrew Beaton speaking at SuperInvestor in November 2015 and insights from Marcus Simpson of QIC of the Australian state of Queensland’s sovereign wealth fund and their success with co-investments.

It's worth listening to these views and just reinforces that in order to have a successful co-investment program, you need to hire smart people who know what they're doing in private equity and develop strong strategic relationships with private equity partners all over the world.