Corporate venturing, as the name suggests, has a bias towards venture capital – but should that be the case?
Last week, Germany-based car manufacturer Daimler took a minority stake in Motor Coach Industries International (MCI), owned by respected private equity turnround firm KPS Capital Partners. Unlike many of the companies backed in corporate venturing-like deals where a corporate takes a minority stake in another company, MCI is not a new technology company: – its roots go back to 1933 and as a long-distance bus manufacturer.
MCI has a distinguished history as manufacturer of many buses used by Greyhound, the US bus company, which owned a majority stake in Motor Coach Industries for 45 years until it was spun off in 1993.
Unsurprisingly, given its sector, Motor Coach is a company which has recently fallen on harder times. KPS acquired it out of a “multi-stakeholder recapitalisation” in 2010.
Yet history has since improved the fortunes of the company, if its owner’s account is correct. KPS partner Jay Bernstein said of the deal: “The investment by Daimler validates MCI’s transformation under KPS’ ownership and accelerates the company’s growth trajectory.”
In part, the deal appears to be a so-called “anti-embarassment” stake. Daimler has bought into the company, as it has sold MCI its Setra motor-coach business in the US and Canada. Knowing that corporate carve-outs are often some of the most lucrative deals hatched by private equity firms, it is of course wise for corporates to look into whether they should retain a stake in any spin-out.
These deals remain the most common transactions hatched by buyout firms with corporates, think US-listed media company News Corporation’s spin-out of NDS to leveraged buyout firm Permira, Netherlands-based Electronics group Philip’s spin-out of NXP to a large buyout consortium, or eBay’s spin-out of Skype to another private equity consortium.
Yet there is a very large untapped market of private equity companies where corporate tie-ups should be sought. Private equity firms have had to come to terms with holding on to companies bought at bubble valuations at the height of the 2006 and 2007 credit boom. These are often top tier companies in their sectors, which may be difficult or risky to digest whole. Yet corporates may be able to help private equity firms de-risk these companies and put them on path towards an initial public offering or trade sale, possibly to the corporate that works with the private equity firm.
US-based pharmaceutical chain Walgreens acquiring a 45% stake in UK-based pharmaceutical group Alliance Boots last month is arguably a deal which shares some of these characteristics, as the US-based pharmaceutical group has held off from purchasing 100% of Allliance Boots.
Given returns from the venture industry generally have been even more disappointing than those of private equity firms in recent years, it is still the big buyout houses which generate the most institutional investor interest.
Perhaps as buyout firms have been weakened by the boom market excesses, but still have significant clout, it is worth thinking about “corporate venturing” more with these companies’ portfolio companies, when a buyout firm believes a full exit will not meet its return expectations.
In dealing with financial investors, capital-rich and well-resourced corporates with a contrarian view can do more than become the lynchpins of out of fashion venture capital segments like clean tech and healthcare, which has the obvious risk that VCs are pulling back from these sectors wih good reason. They can also pick choice tie-ups with companies they are wary of acquiring. Get that call out to Henry Kravis and Steve Schwarzman.