Private Equity Firms Eye Mega-Exits as Key to Unlocking Investor Cash
The recent $16.4 billion sale of Calpine Corp to Constellation Energy has sparked optimism within the private equity world that similar large-scale exits could help an industry struggling to return investor cash. The trio of investors – Energy Capital Partners (ECP), Canadian pension fund CPP Investments, and Access Industries – are expected to reap a return of around four times their original investment, according to sources familiar with the matter.
A Rare Breed of Deals
Mega-exits like the Calpine sale are few and far between in the buyouts world. Between 2020 and 2024, only 27 sales worth more than $10 billion were struck out of almost 2,900 U.S. companies divested by private equity, according to data provider Dealogic. Other notable deals in 2024 include GTCR and Apax Partners’ sale of insurance brokerage AssuredPartners to Arthur J Gallagher for $13.45 billion, and Home Depot’s $18.25 billion purchase of hardware supplier SRS Distribution from Leonard Green & Partners and Berkshire Partners.
Industry Struggles to Offload Bets
The private equity industry has been grappling with the challenge of offloading investments made during the boom years of the late-2010s and early 2020s. With the overall dealmaking environment expected to be favorable in 2025, industry participants are hoping that even a small increase in mega-exits could help improve the recycling of capital and alleviate pressure from impatient investors.
Favorable Conditions Ahead
Industry experts believe that 2025 will have the right conditions for a surge in dealmaking. “Public equities feel like they are somewhat overvalued, so people are looking for private deals,” said John Grand, co-head of the corporate practice at law firm Vinson & Elkins. “Interest rates are coming down, and you also have political predictability for the next few years.”
The Goldilocks Effect
Larger deals can be more efficient in returning cash to investors versus the time needed to execute multiple smaller investments. However, they are complicated to pull off, requiring a perfect alignment of factors. “They are Goldilocks transactions,” said Bill Nelson, a partner at law firm A&O Shearman.
Pressure to Reward Investors
The pressure to reward limited partners (LPs) is increasingly prominent. The ratio of exits by private equity versus new investments fell to a record low in 2024, while at the current pace it would take eight years for buyout firms to exit their existing U.S. portfolios, according to data from PitchBook. Distributions to paid-in capital (DPI) is a key metric that evaluates money managers in terms of how much cash is returned to investors.
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