the ‘lazy’ days are over

One scoop to start: Pfizer chief executive Albert Bourla plans to meet Starboard Value, said people familiar with the matter, as the activist investor’s $1bn stake in the pharmaceutical group puts pressure on its board to revive its share price.

And Japan goes in on Texas energy: Chevron was in talks to sell its east Texas natural gas assets to Tokyo Gas, said three people familiar with the discussions, as the Japanese utility looks to expand its access to abundant US reserves of the fuel.

In today’s newsletter:

The best of this year’s Due Diligence Live

We’re writing to you live from Mayfair, where our annual Due Diligence Live conference has officially wrapped up. And we have a lot to report back.

Even as interest rates start to come down, financial titans spanning from New York to London are still brainstorming ways to generate returns for investors as they wait for a comeback in deals.

That was one of the big themes at this year’s event in London, which featured a who’s-who in the world of dealmaking.

Some of the biggest names in private equity, activist investing and private credit gathered at the Biltmore Mayfair hotel to reflect on the year and to weigh in on what might lie ahead for global financiers in the coming months.

One of the biggest gripes to surface is that rate cuts from the Federal Reserve and European Central Bank haven’t yet unleashed a wave of tie-ups or companies willing to go public. In other words, there still aren’t enough ways for private equity groups to exit their investments.

Before March of 2022, “the whole sector was lazy because of very cheap interest rates”, said Anuj Ranjan, the chief executive of private equity at Brookfield. Ranjan added that at that time, financial engineering alone could crank out cushy returns.

“We as an industry are shifting from roll your dice to roll up your sleeves private equity . . . there’s no other way to make 25 per cent IRRs that we want to deliver,” he said.

Lia Larson, a partner at Goldman Sachs, said that the days of simply advising clients on how to sell their businesses or float were over. “In the interim period, before we see a larger influx of demand, we have to think about other ways for them to monetise.”

Some solutions: partially monetising portfolio companies by selling stakes, rolling over assets into continuation funds, or leaning into dividend recapitalisations.

But the “incredible hangover” from the “crazy party” of deals in 2021 — as Alison Harding-Jones, global head of M&A at Deutsche Bank put it — has also created opportunities.

Elliott Management is one activist investor that has pounced. Nabeel Bhanji, an equity partner at the firm, estimated that the group has about 20 major equity positions.

While a good chunk of those are in the US, public companies trading lower in the UK have provided a number of potential targets. “It does seem like there’s just a persistent undervaluation problem in some of these jurisdictions,” said Bhanji.

As a result, a group of businesses that Elliott had followed for a long time were now trading “very cheap” compared to their absolute free cash flow. The number of those now at a discount were “a lot larger than they’ve ever been”.

While UK dealmaking and the stock market have notoriously lagged behind their equivalents in the US in recent years, executives at the conference suggested they haven’t yet given up on the region.

“There’s value to be had, and if we see the right deal in the UK, would we invest in it? Absolutely,” said Raj Rao, president and chief operating officer of Global Infrastructure Partners, which recently closed its deal with BlackRock.

And there’s more: Elliott spoke for the first time publicly about its hopes for Anglo American since disclosing its $1bn stake, and General Atlantic’s Bill Ford spoke about how a capital gains tax increase would impact his firm.

Ares bulks up in real estate as it looks beyond credit

Private equity behemoths have been bulking up. Often, that has meant buying a private credit shop: look no further than TPG’s takeover of Angelo Gordon or Brookfield’s investment in Oaktree.

But Ares Management, already one of the largest private credit investment firms on Wall Street, is going the other way.

Earlier this week the company struck a deal to buy the international arm of real estate investment manager GLP Capital Partners, agreeing to pay up to $5.2bn for the business.

The deal will add $44bn to Ares’ assets under management and will put the firm in serious competition with the private investment behemoths in real estate: Blackstone and Brookfield.

It’s all part of chief executive Michael Arougheti’s push to broaden Ares beyond its roots in credit. He’s set a goal of surpassing $750bn in assets by 2028, putting the firm toe-to-toe with the biggest names in the industry including KKR and Apollo Global Management.

The deal for GLP’s non-Chinese business will give the combined operation close to $100bn in real estate investments, adding a large footprint in Asia and Europe to Ares’ portfolio.

“We are able to come into the deal having underwritten property values in a higher interest rate environment,” Arougheti told DD’s Eric Platt. “As interest rates come down . . . you should see an improvement in economics. We’re buying in at the right time.”

The investment also gives Ares large holdings of data centres and logistics operations. It’s an opportunity Arougheti says is well timed, even as every rival raises a fund to invest in data centres (they’re all wagering on the AI boom continuing).

“This market is so massive in terms of the data centre demand,” he added. “There is still a significant undersupply of capital to meet that demand.”

The firm has also been opportunistic in how it has decided to finance the buyout. Ares stock trades at multiples far above its rivals, giving it a strong currency to tap into. It’s paying more than half of the $3.7bn purchase price with its own shares.

And the $1.5bn long-term incentive plan it has agreed also relies heavily on Ares stock: it disclosed it could pay out as much as 85 per cent of that figure with its own shares.

GLP managers joining Ares will be keen to see its multiple and stock hold up as those payouts come into view (the earnouts run through 2027). As will the owners of GLP who are sticking with its business in China. They’ve just been handed about 3 per cent of Los Angeles-based Ares.

Job moves

• Bank of America has named Eamon Brabazon co-head of global M&A, alongside Ivan Farman. He most recently worked as head of Emea M&A and has been with the bank since 2015. 

• Veritum Partners has hired Andy Griffiths as a partner. He was previously chief executive and co-founder of the UK’s Investor Forum and was also an operating partner at Corsair Capital. 

• Kirkland & Ellis has hired private equity lawyer Sebastian Pitz as a partner in Frankfurt. He joins from White & Case.

• Menes Chee, one of the founding members of Blackstone’s tactical opportunities team, has left the firm, Bloomberg reports.

• TPG’s co-managing partner and head of credit Josh Baumgarten is resigning from its board of directors immediately, and will leave the company by the end of the year, according to a regulatory filing.

• Kering has appointed Stefano Cantino as the new chief executive of its troubled top brand Gucci as the luxury group tries to revive its performance. Cantino, who will start in the post in January, was formerly an executive at rival LVMH’s Louis Vuitton.

Smart reads

Right-leaning Dovid Efune, who has built up a reputation for shepherding conservative publications, has emerged as the frontrunner to buy The Telegraph, the FT reports. What would his ownership mean for the storied British newspaper?

Jab dreams Pfizer rode the lucrative wave of developing one of the world’s most effective and first Covid-19 vaccines, Lex writes. Now that those sales have waned, so has its stock price, creating a situation ripe for an activist.

America’s heartland With truck stops, churches and strip malls, two small towns in Alabama and Virginia look much like thousands of others in the US, Bloomberg writes. Dissecting them reveals the depth of the economic rivalry between the US and China.

News round-up

Chevron in talks to sell Texas gas assets to Tokyo Gas for up to $1bn (FT)

Abu Dhabi writes off 9.9% stake in Thames Water (FT)

Honeywell plans to spin off advanced materials business (WSJ) 

Top US banks brace for lowest lending incomes in almost 2 years (FT)

Shein’s UK arm surpasses £1.5bn revenue mark (FT)

Northvolt subsidiary files for bankruptcy (FT)

FCA pledges to reduce barriers to specialist trading companies (FT)

Pension funds call for UK fiscal rule change to spur investment (FT)