Buyout kings seek U.S. partnerships as deal prices rise

Tue Dec 31, 2013 11:25am EST
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By Greg Roumeliotis

NEW YORK (Reuters) - Private equity firms are increasingly seeking to partner with U.S. companies rather than buying them outright, as they struggle to find ways to put their huge piles of money to work at a time when frothy markets have made takeovers expensive.

Major U.S. buyout shops, such as Blackstone Group LP (BX.N: Quote) and Carlyle Group LP (CG.O: Quote), are looking at deals such as minority investments in companies or partnerships with companies looking to make an acquisition -- types of transactions that they largely shunned before the financial crisis of 2008.

Carlyle, for example, did no such deals in Carlyle Partners IV, a $7.8 billion U.S. buyout fund raised in 2005. But it ended up investing about 15 percent of its $13.7 billion Carlyle Partners V fund, raised in 2007, in such non-conventional deals.

It sees potentially even more such deals for the U.S. fund it raised this year, the $13 billion Carlyle Partners VI fund. In September, for example, it agreed to invest $500 million for a minority stake in Beats Electronics LLC, the headphones company co-founded by rapper Dr. Dre.

"You clearly need to do more of those deals to get your targeted rate of return," said Peter Clare, co-head of Carlyle's U.S. buyout group, who noted that the share of non-conventional deals could top 15 percent in its latest fund.

Private equity executives argue non-conventional deals can be more lucrative when full-blown buyouts are expensive. Competition for them is less, as the transactions are custom-made and often do not involve auctions.

"Once we have an investment in a company we will do everything we can to help them achieve their goals, whether it is investing more money or not," Clare said.

While such non-conventional investments account for a small minority of private equity deals, they underscore the industry's desire to avoid the debt-fueled excesses of the 2005-2008 buyout boom in today's environment, in which cheap financing and high equity prices favor selling companies rather than buying.   Continued...

Stephen Schwarzman, chairman and CEO of the Blackstone Group, gives a speech at a news conference for the launch of the Schwarzman Scholars at the Great Hall of the People in Beijing, April 21, 2013. REUTERS/China Daily