The founders behind Lego and German publisher Axel Springer are teaming up with buyout firms in a growing trend
By Carol Ryan
The family that owns Danish toy maker Lego is teaming up with U.S. private-equity giant Blackstone to take Merlin Entertainments private. Photo: neil hall/epa-efe/rex/shuttersto/EPA/Shutterstock
Something has clearly changed when family businesses refer to private equity as a good long-term partner.
Two proposed delistings in Europe—of German publisher Axel Springer SPR -0.08%▲ and Merlin Entertainments , MERL -0.04%▲ the owner of Madame Tussauds waxwork museums and other attractions—show that buyout firms are getting better at appealing to families that still own significant stakes in many public companies.
An already shrinking stock market probably stands to lose more of these businesses. In 2018, there were 164 private-equity deals involving a vehicle that manages the assets of a wealthy family—a 36% increase on the previous year and a decade-high, PitchBook data shows.
Last Friday, the investment arm of the Kristiansen family that owns Danish toy maker Lego said it was teaming up with U.S. private-equity giant Blackstoneto take Merlin private in a deal that values the business at $7.5 billion including debt. Two weeks earlier, those behind Axel Springer backed an offer by KKR , KKR 2.41%▲ one of Blackstone’s smaller rivals, to buy out the publisher’s minority shareholders.
Disenchantment with public markets was an issue at both companies. Management used the opportunity to grumble about stock investors and analysts undervaluing their stock or being too focused on short-term financial results.
There is some truth in this analysis. Public companies currently trade at lower valuations to peers that are bought privately—only the third time in recent history this has happened, according to Bain & Company analysis. Buyout firms are investing over longer time frames and thinking beyond simple cost cutting to create value. In the past, many family businesses didn’t like the prospect of an IPO or sale within five years, when a private-equity buyer would typically look to cash out. Blackstone is financing the Merlin deal through its Core private-equity fund, which can hold assets for 10 years or more.
Some of the world’s biggest private-equity names, including KKR, CVC and Carlyle, have set up similar vehicles. From the start of 2015 to the first quarter of 2018, long-dated funds have accounted for 4.4% of all capital raises above $1 billion, according to a report by business school Insead. The cash is typically invested in low-risk businesses that generate good cash flow and don’t need a major overhaul. Typically, the funds have annualized return targets of 10-15%, compared with 20%-plus for riskier investments.
Several factors are pushing buyout firms to own assets for longer. Institutional investors and pension funds who are pouring money into private equity want ways to lock up their money for longer to avoid the bother of constantly finding new ways to reinvest. To compete for deals against acquisitive sovereign-wealth funds, it makes sense to offer longer investment terms. And with over $2 trillion of dry powder to spend, private equity needs to push into new sectors and businesses that only offer decent returns to investors that stick around.
Family businesses will probably remain a target for private equity: Of the 500 largest family businesses in the world, as compiled by EY and the University of St. Gallen, over half were publicly listed. More might welcome a few years away from the market spotlight.
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