Private equity’s future after the boom and bust

One scoop to start: UK tax authorities probed Manchester City in 2018· over whether it used complex arrangements to underpay tax, nearly a decade before the club was found to have breached the Premier League’s financial rules.

And another one: Elon Musk’s SpaceX is seeking to raise $40bn· in a financing effort led by Apollo Global Management to purchase Nvidia chips as the AI and rocket group amplifies its bet on the chipmaker’s advanced technology.

In today’s newsletter:

• A vibes report from DD’s private capital summit

• McKesson and CD&R strike a healthcare deal

• Sainsbury’s returns to dealmaking

Blue Owl eyes its next bets after a rollercoaster year

The mood in the $22tn private capital industry was captured on Tuesday by Doug Ostrover, co-founder of Blue Owl, at the FT and Latham & Watkins’ Private Capital Summit.

Blue Owl has in many ways been the poster child for the troubles facing the fast-growing industry, which has had to weather fears of rising defaults and surging redemptions at private credit funds as well as uncertainty over the future of software and professional services companies in the AI age.

After about a year of intense scrutiny, Ostrover couldn’t say for certain the worst was over in private credit despite signs of resilient performance.

But there was one call he was willing to make on Tuesday: “I think the worst is over with regards to the media,” Ostrover said, referring to coverage by the FT and other publications.

DD had gathered Ostrover and other luminaries of private capital at the Biltmore Mayfair Hotel in London to take the temperature of the industry after a year in which shares of publicly traded private capital giants have fallen and their growth has slowed.

Ostrover said there’s a disconnect between investor perceptions· and the performance of underlying loans. Credit performance remains strong, he said, adding he could “look out 12 or 18 months and feel pretty good that these portfolios will continue to perform”.

“I know people think defaults are going to be going up. I don’t see that occurring,” he added.

Ostrover also said he didn’t expect private equity firms to walk away from companies they’d purchased when interest rates were lower in 2020 and 2021, but would instead find new cash to recapitalise investments with underwater equity. In that scenario, Blue Owl and other lenders would have their loans repaid in full.

“We’re seeing companies that are relatively healthy businesses, but where somebody overpaid,” he said. “They will figure out a way to elongate that equity option.”

Ostrover also said Blue Owl is planning a “big push” into insurance, though he ruled out acquiring an insurer outright, a strategy some rivals have used to turbocharge their growth.

“Apollo bought Athene. KKR bought an insurance business. We’re thinking about it more from the balance-sheet-light approach,” he said.

Blue Owl meanwhile has expanded aggressively into real assets, including the infrastructure underpinning the AI boom. Ostrover said the group’s business of building and operating data centres has grown to rival that of Blackstone’s, and that Blue Owl now has 140 facilities that it leases to large tech groups.

Ostrover said that even if the infrastructure is worth “zero” at the end of the leases, its investors will make double-digit returns.

The veteran financier’s mood was echoed by many at Tuesday’s summit.

Top industry investors including John Redett at Carlyle Group, Permira co-chief executive Dipan Patel, Julian Salisbury of Sixth Street and Nic Humphries of HG Capital offered views on where they are seeing opportunities and how indigestion in the private markets would shake out.

Specialist investors in infrastructure such as Tara Davies of KKR offered a sunnier outlook, while Apollo’s Emea head Diego De Giorgi pounded the table on the $1tn asset manager’s opportunity to make investment-grade loans across the Eurozone, underscoring the changes afoot in the industry.

The FT will have more comments from the conference in the coming days on areas where dealmakers are optimistic, such as so-called capital solutions and a realism on seller valuations that may revive industry returns.

A $5.8bn healthcare buyout

McKesson, the largest US drug distributor with more than $400bn in revenues, struck its biggest deal· in more than a decade on Tuesday — and notably did so with the help of private equity group Clayton Dubilier & Rice.

McKesson and CD&R on Tuesday announced they were pairing up to take Option Care Health, the largest independent infusion services provider in the US, private in a $5.8bn deal, confirming a scoop from DD’s Oliver Barnes.

CD&R will own a 51 per cent stake in Option Care, while McKesson will be a minority shareholder. But the drug distributor holds the right to purchase the buyout group’s stake in the future.

The deal is part of a growing trend in the healthcare sector and elsewhere of companies teaming up with private equity groups holding industry specialities to strike ambitious deals.

CD&R, a corporate carve-out specialist with an expertise in healthcare, has collaborated on deals with French drugmaker Sanofi, as well as US health insurers Humana and Elevance Health in recent years.

Similarly, Advent, a private equity group with a long history in payments famed for its carve-out of Worldpay from RBS during the financial crisis, was earlier this year pursuing a deal to buy PayPal alongside payments company Stripe for $53bn before talks fell apart.

Smaller healthcare services groups are unloved by investors at the moment, creating opportunity for companies such as Cardinal Health and Cencora to enter direct care for patients, a pivot where DD reckons private equity will have a role.

The new age of UK supermarket mergers?

For the past few months the retail rumour mill has been in overdrive with speculation that supermarket M&A could be back on the cards. 

This week the FT revealed there had been more than just chatter as Sainsbury’s, Britain’s second-biggest grocer, indeed held deal talks with its smaller rival Morrisons. The talks ended in February and broke down over price.

Such talks have the potential to redraw the UK food retail space entirely. 

Many in the industry are surprised Sainsbury’s has the chutzpah to have another run at competition regulators after its £7.3bn merger attempt with rival Asda was blocked eight years ago. 

However, the game has changed dramatically since then. The so-called Big Four of British food retailing are no more as Asda and Morrisons have fallen down the pecking order and their market share has been eclipsed by discounters Aldi and Lidl. As a result, regulators wouldn’t have to consider a deal that creates a new market leader but instead a tie-up between the second- and sixth-largest grocers in an intensely competitive market.

Meanwhile, Morrisons and Asda are both private equity- owned and industry insiders say a potential combination shouldn’t be ruled out in the medium term. 

And whichever of Asda, Sainsbury’s and Morrisons is left on the shelf could still benefit from being the buyer of stores that would probably have to be sold in order to satisfy the regulator’s overlap concerns. There may be some retail therapy for all sides in the future.

Job moves

• Goldman Sachs has named Jane Dunlevie co-head of technology, media and telecommunications in investment banking.

• Skydance has named Ynon Kreiz, co-CEO of Skydance, Laurene Powell Jobs, president of Emerson Collective, and Bobby Kotick, former CEO of Activision, to its board. Former UK prime minister Tony Blair has been named as a board adviser.

• Barings has hired Sloan Sutta as global head of asset-based finance in New York. He previously worked at Crayhill Capital Management.

• Citi has hired Hajime Higuchi as head of M&A for Japan and named Yoshinobu Agu as head of sponsor coverage for Japan. Higuchi previously worked at Nomura.

Smart reads

Class war If California votes in November to impose a one-time levy on the state’s billionaires, it could portend a seismic shift· for the fortunes of the wealthiest Americans, Edward Luce writes for the FT.

New bank Capitec launched in South Africa in 2001 with a handful of payday loan shops. Now it boasts 26mn clients, more customers than any other bank in the country and is setting its sights beyond South Africa, the FT reports.

Relaxed rules The UK competition watchdog is taking a back seat in reviewing BT Group’s eleventh-hour swoop on broadband rival TalkTalk, Lex writes. That may be a relief for TalkTalk’s backers but will do few favours to other stakeholders. 

News round-up

Informa to buy rival events business Clarion from Blackstone for £2.2bn (FT)

Debt in the spotlight as Paramount closes $111bn deal for Warner Bros· (FT)

Billionaire Newhouse family rules out Condé Nast sale· (FT)

Hong Kong quizzes HSBC over Singapore AI hub decision (FT)

Palmer Luckey’s Erebor surges to more than $7bn in deposits since launch· (FT)

Insurance claims to test Altman and Amodei liability for ‘rogue’ AI (FT)