PSP Investments Puts its Stamp on Private Credit
Private equity group Thoma Bravo’s $6.6bn acquisition of Stamps.com last week came with a surprising twist in the deal documents: the absence of a traditional bank financing the leveraged buyout.
Large debt-financed takeovers by the private equity world have historically been underwritten by household names on Wall Street, institutions such as JPMorgan Chase, Goldman Sachs and Bank of America.
Thoma Bravo’s private equity funds will stump up $4bn for ownership of Stamps.com, a mailing and shipping business with $758m in revenue last year.
To get its deal over the line, the group turned to four private lenders to provide the $2.6bn in debt financing. Ares, Blackstone and PSP Investments will provide the majority, with Thoma Bravo’s own lending arm making up the difference, according to people familiar with the matter.
The deal underscores the massive firepower private credit funds have amassed and how they are putting that cash to work to finance bigger takeovers, according to people involved in recent deals.
Cash sitting in such funds has grown to a whopping $364bn globally, according to data from Preqin, and more than $80bn has been raised so far this year, as low interest rates send investors hunting for higher yields in private markets.
Often the funds are run by the same institutions that separately operate large private equity funds. Marquee names such as Ares, Apollo and Blackstone might compete for an acquisition and then end up as partners in the debt financing. Like Thoma Bravo in the Stamps.com deal, they might end up as both borrower and lender, private equity on the one side, private credit on the other.
“It reflects the massive amount of cash on the sidelines looking for yield coupled with managers increasingly attempting to be involved in not only the acquisition but all phases of the transaction,” said Matthew Mish, a credit analyst at UBS.
The Stamps.com deal extends a long-cultivated relationship between Ares and Thoma Bravo. Ares led one of the first $1bn plus non-bank financings for the private equity group’s takeover of data analytics business Qlik in 2016.
Such private loans have been getting larger in the years since. In March, lender Owl Rock and a consortium of other funds that included Goldman Sachs’ private credit arm agreed to provide a $2.3bn loan to Thoma Bravo to fund its takeover of financial services software provider Calypso Technology.
Traditional bank financing remains the go-to for most takeovers. But the loans and bonds that the banks are underwriting are mostly sold on to a wide group of lenders, and so are priced based on the whims of the market. A sudden jolt of volatility or shift in investor sentiment can alter the financing terms of a deal.
Private credit funds proffer that companies are turning away from bank financing for increased confidentiality and greater certainty of receiving the funds, along with a faster turnround time between agreeing the deal and securing the cash.
“In large take private transactions like Stamps.com, companies find that scaled private capital providers such as Ares offer several significant competitive advantages versus using a syndicate of banks,” said Kipp deVeer, head of credit at Ares Management.
However, it comes at a cost and in more subdued markets, especially when there is significant demand among a broader swath of credit investors, it is typically cheaper to borrow through bonds or loans organised by the banks, according to multiple investors and bankers.
“You pay up slightly [for private credit funding], but it’s insurance cost,” said one banker involved in debt syndications. “You know you can get a deal done with them. You are paying for certainty. In a volatile or uncertain market you are willing to pay that.”
The growing power of private credit funds also reflects the shift in risk appetite that has filtered out through financial markets since the 2008 crisis, with banks stepping back from large, highly leveraged financings. New, non-bank players have increasingly stepped into the void.
Their growth raises a question about whether the competition to deploy funds will raise risk in the system.
Private equity firms have already shown their willingness to stretch to clinch a deal. The average purchase price of buyouts in the fourth quarter of 2020 was 12 times earnings, according to S&P Global’s LCD, eclipsing a full-year record of 11.5 times set in 2019.
The Stamps.com deal will put the company’s debt-to-earnings ratio at more than 8 times, according to people familiar with the terms, more leverage than banks regulated by the Federal Reserve, FDIC and Office of the Comptroller of the Currency are typically comfortable guaranteeing.
Stamps.com, Thoma Bravo, Ares and Blackstone declined to comment. PSP did not respond to a request for comment.
Elizabeth Tabas Carson, a lawyer at Reed Smith, said the financing involved in the Stamps.com deal was a “stunning amount”.
“It will be very interesting when the music stops,” she said. “But given the experience of the last 18 months, I think people are either hoping it won’t or figure they keep deploying [cash] until it does so they don’t miss the upside.”
Indeed, when the music stops, it will be interesting to see how large direct lenders adjust their risk but for now, with rates at record lows, pensions are allocating more to them to squeeze blood out of fixed income stones.
Now, the Stamps.com deal caught my attention, mainly because of the players involved and the size of the acquisition:
El Segundo-based ecommerce postage company Stamps.com Inc. will be acquired by Thoma Bravo, a Chicago-based private equity firm, for $6.6 billion in cash, the companies announced July 9.
Thoma Bravo will pay $330 a share, a 67% premium on Stamps.com’s closing price of around $198 per share on July 8, the day before the merger was announced. The company’s stock skyrocketed 64% the next day, closing at around $324.
Stamps.com will become a private company and will be delisted from the Nasdaq. The acquisition is expected to close in the third quarter of 2021 and is subject to regulatory and stockholder approval.
Stamps.com will continue to operate out of its El Segundo headquarters after the deal closes.
“This transaction is a testament to the excellence and hard work of all of our employees and their relentless dedication to our customers and partners throughout the world,” Ken McBride, Stamps.com’s chairman and chief executive, said in a statement.
Ruhell Amin, sector lead at Playa Vistabased independent advisory firm William O’Neil and Co., said the premium paid by Thoma Bravo was justified. It was only a matter of time, he added, before a private equity firm recognized the company’s value. According to Amin, Stamps.com has consistently been undervalued by public markets despite often beating analysts’ earnings expectations.
“I’ve always viewed Stamps being a bit of a juggernaut in the ecommerce space and always believed that the shares could eventually garner premium valuation,” Amin said.
Stamps.com has a 40 day “go-shop” period, expiring Aug. 18. During this time the company’s board and advisers can solicit and consider acquisition proposals from third parties and terminate the merger with Thoma Bravo if Stamps.com receives a “superior proposal,” the companies said in their announcement.
But Stamps.com said it would benefit from Thoma Bravo’s operating capabilities, capital support and technology and software sector expertise. The company’s board unanimously approved the merger and recommended its stockholders do the same at its upcoming meeting regarding the merger.
“With the financial and operational support of Thoma Bravo, Stamps.com can continue to innovate and pursue growth opportunities to capture the expanding ecommerce shipping market and extend our position as the leading global multicarrier ecommerce shipping software company,” McBride said.
The acquisition is one of several major purchases made by Thoma Bravo this year, including a $2 billion acquisition of cloud software company QAD Inc. in June and a $12.3 billion acquisition of security software company Proofpoint Inc. in April.
Thoma Bravo manages $78 billion in assets and is one of the largest private equity firms in the world. Its portfolio includes McAfee, Glendale-based ServiceTitan Inc. and Tripwire Inc.
The company said Stamps.com is well positioned to capitalize on long term trends in the ecommerce industry due to its management team, software solutions and growing customer base.
“The ecommerce landscape is rapidly evolving, and we look forward to partnering with the Stamps.com team to continue building on the company’s leading position in ecommerce shipping solutions,” Brian Jaffee, principal at Thoma Bravo, said in a statement.
Founded in 1996, Stamps.com was one of the first companies to offer postage online, allowing users to print official Postal Service stamps and shipping labels for a monthly fee of $17.99.
The company went public in June 1999 amid the dotcom bubble. As package shipment and ecommerce sales boomed amid the pandemic, Stamps.com saw earnings jump 33%, bringing in $758 million in fiscal 2020.
For Thoma Bravo, a leading private equity firm that specializes in software and technology companies, to pay such a huge premium to take Stamps.com private, it means they see huge potential for this company.
And the fact that Ares, Blackstone and PSP Investments are providing the majority of the $2.6 billion in debt financing to make this $6.6 billion acquisition happen, tells me they too have strong convictions on this deal and Thoma Bravo's capabilities to add value to Stamps.com.
The person in charge of private credit at PSP Investments is David Scudellari, Senior Vice President and Global Head of Credit and Private Equity Investments.
He and his team have done an outstanding job bolstering credit investments and private equity.
In fact, PSP overhauled its private equity strategy in fiscal 2021, and it paid dividends as that group generated a return of 28.4% last year, compared to a return of 5.4% in the previous year.
I've already gone over PSP's fiscal 2021 results here and remind you where the returns mostly came from:
Credit investments represent just 7% of total assets but they're growing and the more big deals like this that PSP is part of, the faster these investments will grow.
Of course, to be part of these exclusive deals, you need exclusive relationships with the big funds, which David and his team have fostered over the years.
By the way, I also noticed that PSP Investments has recently revamped its senior executive team:
Patrick Samson was promoted to SVP and Global Head of Real Assets Investments (heard nothing but good things about him) and Michelle Ostermann joined the organization this month as Senior Vice President and Global Head of Capital Markets.
Ms. Ostermann was previously a Managing Director at Railpen Investments and prior to that, she was Senior Vice President, Investment Risk, Strategy and Research, at BCI.
She has extensive experience and is a welcome addition to PSP's senior executive team. As the Global Head of Capital Markets, she will be working closely with David Scudellari, Eduard van Gelderen and others to invest across the capital structure all over the world.
I wish her a lot of success as she takes over this important role.
I noticed PSP Capital made its debut on the international bond market in late June and will
soon be back for more. It was joined in the market by International
Finance Corporation’s first ever bond linked to the Secured Overnight
Financing Rate (Sofr), snagging $1 billion in its debut.
In other PSP related news, I note that it allocated to Prime Medicine, a Cambridge, Mass.-based gene editing startup co-founded by biochemist David Liu.
Gene editing is a hot area and David Liu is one of the foremost CRISPR innovators, first investing base editing tech in 2016 and then prime editing tech in 2019.
I certainly hope this biotech startup does find better treatments for all sorts of diseases.
What else? Hungary has offered to buy Budapest Airport from its foreign shareholders, part of an effort to take it back into state hands and protect what the government says are national interests.
The biggest shareholder in Budapest Airport with 55.44 per cent is AviAlliance GmbH, formerly Hochtief AirPort GmbH, owned by Canada’s Public Sector Pension Investment Board (PSP Investments). Singapore’s GIC Special Investments and Canada’s Caisse de dépôt et placement du Québec (CDPQ) each hold a little over 21 per cent.
And PSP has been busy buying up Australian farms, which is creating a bit of a stir Down Under.
I'd love to get more information on that but that is a topic for another time.
Below, Stamps.com recently announced private equity firm Thoma Bravo would take the e-commerce shipping solutions provider private for about $6 billion in cash. CNBC's Jim Cramer and David Faber discuss. Listen carefully to Faber's comments on the financing of this deal.
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