Enterprise software firm Informatica’s buyout is the biggest of 2015, and the latest in a string of deals dominated by international investors that are turning US private equity firms green with envy.
That’s because US investors have been sidelined by leverage regulations on US banks in what could have been an otherwise-frothy deal environment.
Instead, US PE firms are focusing on IPOs, harvesting returns, and smaller deals, having been banished from ‘The Garden of Leverage’ by regulators here. And foreign buyers are having a field day.
Early Tuesday, the size of the leverage package on Informatica’s deal was unclear. What we do know is that it’s big enough to support the Canada Pension Plan Investment Board and UK investor Permira taking the company private to the tune of $US5.3 billion.
Contacted by Business Insider on Tuesday, a representative for Informatica declined to discuss other details regarding the deal’s financing.
Either way, it’s not the buyers that make this deal happen: it’s the international banks placing Informatica’s debt that could help the biggest deal of 2015 go through unencumbered.
International banks are placing more debt for private equity deals, exceeding ‘6-x’ rule
Among the firms financing the deal’s debt are Nomura and Macquarie Capital, both international firms that are not subject to the same regulatory pressure from the Treasury Department’s Office of the Comptroller of the Currency, or the Federal Reserve.
In early 2014, US banks like Citigroup and JP Morgan were warned to not do financing packages that allow private equity firms to foist too much leverage on assets. Accordingly, US banks have been sitting out the financing portion of deals regulators deem too risky.
This isn’t the first time an international buyer has struck a big deal in the US since Treasury and the Fed enacted what Wall Street lawyers and bankers call a ‘too-restrictive’ policy. Last year, the biggest LBO went to British firm BC Partners, which bought out PetSmart in a deal valued at more than $US8 billion. After the deal was announced, Wall Street focused on the leverage package, which, when it was issued, included a higher threshold of debt than what is deemed acceptable by US regulators.
If Nomura, or Macquarie, were headquartered in the US, that might create a difficult dynamic for the Informatica buyout: Treasury and Fed officials have pressured banks that try to use leverage in excess of 6-times Ebitda to complete a transaction.
Post-crisis, PE firms have been following the ‘spirit’ of DC regulations
The combination of foreign banks and foreign private equity firms (also not subject to the same level of regulatory scrutiny as US investors) will likely allow the Informatica deal to pass muster in Washington before regulators who would really prefer the private equity firms doing deals now spent more cash and used less debt.
But that’s counter-intuitive to PE’s plan: they want to use as little cash and as much debt as possible, to do more deals. This is a fundamental problem that isn’t going anywhere.
Re-routing the riskier portion of a financing package to international banks to get a foreign private equity firm’s deal done is the newest work-around for investors looking to duck the letter of regulators’ new rules. To be clear: they’re really not ducking the spirit of the law. Private equity is currently using a lot less leverage than it was, say, in 2007. And that’s exactly what the Treasury Department was looking for in the first place.
That said, the success (or failure) of the new biggest private equity deals could be used to create still-tighter policies regarding how transactions are financed. But before Treasury or the Fed can act, they will need to prove either investors, or American jobs, were harmed by higher leverage. So far, that has not happened.