SunGard listing shows buyout firms hit the bottom of the barrel

Ten years after SunGard Data Systems was bought by seven private equity groups for $11.4bn just as the buyout boom was gathering momentum in 2005, the owners plan to list it as they take advantage of high stock market valuations to offload some of their weakest performing investments.

It is rare for big private equity groups to hold portfolio company investments for more than five years, given the 10-year life cycle of most funds.

During the boom, some of the buyout groups took advantage of frothy markets to flip assets, cashing out barely a year or two after an investment was made. But the market meltdown in 2008, which tempered the appetite for large, highly leveraged deals, followed by the subsequent recession, trapped many investments within private equity funds.

Now private equity groups are scraping the bottom of their collective investment barrels to list the companies that are laggards in their portfolios, by bringing companies to market that they barely value at cost on their books.

The trend suggests the great buyout sale that saw big private equity groups return tens of billions to their investors in the past two years may finally be coming to an end.

Other investments that fall into this bottom of the barrel category include Clear Channel Communications, now called CC New Media Holdings, which Bain Capital and Thomas H Lee bought in 2006 for $26.7bn, and Toys R Us, which Bain, KKR and Vornado purchased in 2005 and which KKR is valuing at 20 cents on the dollar.

KKR is also getting ready to list First Data, a payments company it bought in 2007 in a $30bn transaction, before the end of this year, according to people familiar with KKR's thinking. Last June, it backed up the investment by leading an unusual $3.5bn equity injection, making it KKR's largest single investment.

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"The last two years, the ratio of selling [companies] to buying companies has been four to one for us," said Leon Black, founder of Apollo Global, speaking at the Milken Institute conference at the end of April.

"Recently the ratio has come up a little because we have less to sell," Mr Black said.

SunGard - owned by Silver Lake, TPG, Blackstone, Bain Capital, Providence, KKR and Goldman Sachs' private equity unit - has been a particularly poor investment. While private equity groups tell their investors they hope to achieve at least 20 per cent in returns, SunGard has generated about 1 per cent - and that is before fees.

Strain on financial services companies, the dominant source of revenue at junk-rated SunGard, cut into the company's business in recent years. "SunGard continues to face revenue pressure from a cautious spending environment in the financial services sector and some residual effect of client losses stemming from industry consolidation and restructuring activity," Moody's said late last year. In 2014, the company had a loss of more than $200m on revenue of $2.8bn.

KKR recently marked down its SunGard stake from $1.10 on the dollar to $1, or cost, while TPG valued its investment at 90 cents on the dollar, according to confidential letters to their investors. Blackstone held its $270m of equity at $1.10.

That three of the seven investors cannot agree on valuation indicates how difficult it is to reach unanimity on management decisions in one of the biggest "club" deals ever. Subsequently, allegations of collusion that involved costly settlements with investors after years of litigation as well as unwieldy oversight led the buyout community to turn to their investors rather than to each other to finance the most expensive deals.

In March, Spanish language broadcaster Univision, which five private equity groups bought for $13bn including debt in 2007, said it planned to return to the public market.

The target valuation in SunGard's initial public offering is $7bn, although the group would also entertain a sale since that would allow investors to take all their money off the table at once rather than over time following an IPO.

JPMorgan and Goldman Sachs have been hired to lead the IPO, which could raise about $750m, a person familiar with the deal said.

Additional reporting by Nicole Bullock

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