Excess returns deserve excess attention. And they don’t come much more out-sized than the gains made by two private equity firms in the nondescript business of processing the payments you make every time you whip out your card.
Buyout firms Advent and Bain Capital have made six times their money in as many years from their investment in Worldpay, a payments processing company. In just two years, they reaped as much as four times their investment in Nets, Worldpay's Nordic competitor, which went public last week.
Did Advent and Bain deserve these bumper returns, or did they get lucky?
The duo bought an 80 percent stake in Worldpay from Royal Bank of Scotland in 2010, months after the British lender was bailed out by the government. RBS was a forced seller, but any buyer could have outbid Advent and Bain -- had one chosen to.
Including debt, that deal was worth 2 billion pounds ($2.6 billion). Assuming the firms used debt to fund about 70 percent of the purchase, they probably injected between 650 million pounds and 700 million pounds of cash from their funds.
When it came to selling Worldpay, Advent and Bain snubbed low-ball offers from trade buyers and went for an IPO last year.
The firms reaped about 3.9 billion pounds from selling shares and the value of the 11 percent stake they still hold in the company. Factor in dividends and other payments to owners, and the investment has grown sixfold.
Market forces prevailed when Worldpay was both bought and sold.
It seems that RBS had neglected the business while it was pursued its misguided mission to become a global investment bank. Unshackled, Worldpay was run both more efficiently and for growth: revenue has grown by an average 11 percent under the private equity firms' ownership and Ebitda by 10 percent a year.
Add in the inflationary effect quantitative easing has had on asset prices and the high leverage and the reasons for the bonanza become clear.
With Nets, the two firms were, essentially, able to recycle the same formula they deployed at Worldpay.
Nets was owned by not just one bank but a group of lenders -- something even less conducive to entrepreneurial management.
This time, Advent and Bain had an advantage in the acquisition process because of knowledge of the industry they had gained from Worldpay.
They originally injected about 5.2 billion Danish kroner from their funds ($780 million). In last week's IPO, they raised 9 billion kroner from selling shares and still own a stake valued at about 11.5 billion kroner.
The sale price was set by market forces in last week's IPO. The value-added seems to have come from more aggressive management, including seven acquisitions and cost reductions which eluded the previous owners.
Both investments have benefited from the secular shift from cash to electronic payments, and from the impact of monetary policy on stock markets.
But the money-making opportunity was available to other banks and private equity firms too -- and to the previous owners, including the U.K. government in the case of RBS. They all ought to be kicking themselves.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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