Happy Tuesday! It’s Isabel O’Brien here with Value Add, a free weekly newsletter from Privitas covering the latest private equity operations news. Here’s what you need to know this week.

Done Deal

Deal of the centuries. A common private equity deal? A software company established in the early oughts. Less common? An industrials firm established during the last century.

Unheard of? A private equity deal for a 340-year-old Japanese pharmaceutical company. But there’s a first time for everything.

Last week, Bain Capital placed its $3.3 billion bid for Tanabe Pharma, the pharmaceutical business of Mitsubishi Chemical Group that was founded in Osaka in 1678. If approved, the take-private would constitute the largest private equity deal ever in Japanese healthcare.

Regime change. Why Japanese pharma, and why now? Japan is notoriously slow to approve new drugs due to archaic rules such as requiring testing on Japanese citizens. As a result, far fewer drugs are available to Japanese citizens when compared to those in other developed countries. However, the Japanese Ministry of Health, Labor, and Welfare is looking to ease these rules for specific drugs. 

And it looks like the firm is trying to be a first mover, recently expanding into cancer drugs, central nervous system medications, and immuno-inflammation drugs. 

Pharm to table. Tenabe is not Bain’s first APAC pharma play. Bain bought a stake in Emcure, an Indian pharmaceutical company, from Blackstone in 2013 for just over $82 million. The PE firm only recently exited the asset, with Emcure staging a highly successful initial public offering in July of last year. Seeking to raise $234 million, Emcure raised $11.2 billion in bids, or 68x higher than the amount on offer.

How did Bain get it there? Much like Tanabe, the process for Emcure focused on local markets, with Emcure spinning out its American presence (Heritage Pharmaceuticals, now Avet Pharmaceuticals) in 2022. 

Unlike Tenabe, though, Emcure was a relatively young and nimble company, established in 1981. And more importantly, the asset wasn’t carved out from a larger corporation.

When it comes to Tenabe, however, this is not the case. Most carve-out deals have issues replacing core operational teams like human resources and compliance. Given that Mitsubishi Chemical is centuries old, those elements of Tanabe’s business are probably well-entrenched. This will be one major hurdle for Bain to overcome when spinning out the business. 

Bain did not respond to request for comment.

Portco News

PE portcos also saw some full and partial exits last week:

• Multinational manufacturing company Jabil bought Pharmaceuticals International, Inc. (PII), a pharmaceutical contract development and manufacturing organization backed by a consortium of investors including Athyrium Capital Management and Hildred Capital Partners, in an all-cash transaction. Financial details were not disclosed.
• Warburg Pincus sold its majority stake in Kestra Holdings, a platform for wealth management professionals with $117 billion in assets under management, to Stone Point Capital for an undisclosed amount. Oak Hill Capital will retain its minority stake.
• Providence Equity Partners sold Tempo Music – the owner of a catalog of rights to songs by top-name artists including Wiz Khalifa, Adele, and Bruno Mars – to Warner Music Group (owned by Warner Bros) at a $450 million valuation.

There were also a number of exits-to-be:

• News broke that IVC Evidensia, Europe’s largest veterinary group backed by EQT and Silver Lake, is considering an IPO on the London stock exchange. The firm was last valued at over €12.3 billion ($12.7 billion) in 2021.
• Also rumored to IPO was SailPoint, a cybersecurity firm owned by Thoma Bravo. The firm would be seeking to raise $1.05 billion, or a $11.5 billion total enterprise valuation.
• News also leaked that GTCR has been looking to offload Ultimus, an independent fund administration provider, at a valuation of $2 billion.
• Similarly, Aquiline Capital Partners looked into exiting Hedgeserv, another administrative service provider for funds, at a valuation of $1 billion.
• Also, Ontario Teachers Pension Plan looked into the possibility of selling Miratech, a legal and compliance software company. The pension fund has enlisted Lazard to launch the sale process, which it hopes will garner a valuation of $4 billion inclusive of debt.

Meanwhile, portco M&A was in full swing:

• TA Associates bought and merged FGE and NexantECA, two energy and chemical consultancies. Financial terms of the transaction were not disclosed. 
• Encora, a digital services provider backed by Advent International and Warburg Pincus, acquired the business capabilities portfolio of its competitor DMI for an undisclosed sum.
• Audax-backed RIA CW Advisors bought Aspire Wealth Management and Fernwood Investment Management, two wealth management firms based in Massachusetts. The deals added $800 million in client assets to CW’s platform.
• Paradox, an AI-based conversation platform backed by Thoma Bravo, acquired Eqtble, a human resources analytics platform, for an unknown sum.
• KKR-backed Cotiviti, a healthcare data company, closed in on a deal to buy competitor Edifecs at a $3.05 billion valuation. 

And there were some key people moves:

• Former US Senator Joe Manchin joined Apollo as an advisor and was appointed to the board of directors of Athene, a retirement services business that merged with Apollo in 2022.
• Summit Partners promoted Sergio Mur to partner in the firm’s “Peak Performance Group”, where his job will entail the recruitment of senior executives for portfolio companies.  

Hot Take

Lessons unlearned. The silver lining of the “higher for longer” interest rate environment was supposed to be that private equity dealmakers would ween off their dependency on debt. For a while, that was true – debt-to-equity ratios for leveraged buyouts were at historic lows, with 2023 and 2024 seeing an average of 51 percent and 48 percent equity infusions in PE-backed deals.

Despite 2024 being a banner year, Q4 showed warning signs of this reversal.

According to Pitchbook’s recent US LBO Debt Quarterly Trend Lines Report, the percentage of equity on deals for that period was 47 percent for take-privates (still relatively high) and 42 percent for other PE-backed deals (shockingly low – closer to figures seen before 2022’s rate hikes). 

And, for the first time, more-risky private credit loans are taking the front seat in financing LBOs. Indeed, according to S&P Global, private credit funds financed 77 percent of leveraged buyouts in 2024 (and 83 percent of buyouts between January 1 and January 22 of this year) – a record-setting figure.

Stunted value creation. You can’t have a leveraged buyout without leverage – so why raise the alarm bells? Going beyond the typical bankruptcy risk argument, there’s also a significant restriction to value creation when portcos are saddled with debt, even if it's debt they’re able to repay. Money spent on interest payments could easily be used for R&D for new products, roll-up acquisitions, or talent amelioration.

And furthermore, with dry powder levels still at record highs, it’s not only a bad look to load portcos up with debt and minimize your firm’s skin in the game, but also an ill-advised move. Better to put cash to work than have it sitting while interest payments build at portfolio companies. 

More from Privitas

• Leonard Green’s Twice-Bankrupt JOANN: A Cautionary Tale? (Read)
• Are All of 2024’s Bad Assets in Continuation Funds? (Read)
• Mega Fund Exit Trends 2025 (Read) 
• Small Exits Outperformed Large Ones in 2024 (Read)
• Portco CFOs Key to Successful Roll-Up Strategies (Read)

That’s all for this week – thanks for reading. Have questions? Email isabel.obrien@privitas.com