How are we doing on SunGard after 5+ years?

Bueller? Bueller? Bueller?

At the time, the 2005 US$11.3 billion SunGard leveraged buyout was the largest equity cheque ever written: US$3.5 billion.

The sponsor syndicate was as impressive as can be, with Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. L.P., Providence Equity Partners, Silver Lake and Texas Pacific Group all taking a slice. If these LBO firms sound familiar to Canadian taxpayers, it’s because back in 2005, CPP Investment Board was a limited partner in four of the seven proponents: Blackstone IV and V, KKR Millennium, Silver Lake II, and TPG IV. Which means that the CPPIB is exposed to this particular LBO four different ways: something that you don’t see very often, and certainly isn’t the optimal design of even a long, long term external private equity strategy; what’s the point of having a diversified team of fund managers if you’re not going to have diversified deal flow?

According to CPPIB’s website, it also took down some of the deal on a co-investment basis. That’s the 5th different way we are invested in this single mega LBO.

Did I mention that we put money into the then largest LBO five different ways?

The deal closed on August 11, 2005, when the Canadian dollar was trading at 1.20026 per USD. Let’s assume the co-investment was made on that day, and that all of the LBO shops drew their capital from their LPs on that day too. CPPIB’s non-Canadian investments are unhedged, as we understand from public statements by senior CPPIB executives. Which means we are already sitting on a bad currency loss.

One of the challenges with investing in all of the big name buyout firms is what happens when all of them get together and invest as a group. In the Sungard case, it appears that CPPIB would have had four different capital calls on the deal from four different GPs, plus their own co-investment.

Let’s assume for the moment that CPPIB was a 5% LP in the various firms that did the deal (which is the proportion of CPPIB’s stake in the KKR fund, for example), with no exposure to the other three. That gives us about US$125 million into the deal (3%) via the LP drawdowns. And, if one’s going to do a co-investment, you’re not going to do $10 million slug. Let’s estimate that US$50 million was committed on that basis, too. US$175 million at 1.20 exchange rate equates to a C$210 million drawdown for 5% of SunGard’s equity (pre stock option dilution).

It has been more than five years, and there’s little buzz in the marketplace on SunGard. According to the December financial statements, SunGard had debt of about US$8.3 billion, negative working capital, EBITDA of US$1.043 billion, and lost US$570 million last year.

Debt to EBITDA multiple of 8x is a lofty figure, even in LBO land. In a space that might trade at 18-22x earnings, that metric won’t work here since there aren’t any earnings to value. With free cash flow of US$721 million, perhaps a 15x multiple is a proxy for SunGard’s current Enterprise Value. That amounts to US$10.8 billion. Take off net debt of US$7.6B (which is generous given the US$1B of deferred revenue) and the equity is worth US$3.215B, or C$3.086B.

So, if CPPIB put C$210 million in for 5% (let’s assume the option plan diluted all investors by just 5%) back in 2005, that stake is worth about C$146.6 million today. We’re down 30.1% on our investment on that basis. Obviously, these numbers are merely an outsiders’ educated guess; but they appear directionally accurate.

According to Renaissance Capital, no IPO filing is around the corner, so we are going to be holding this position for some time to come. For all of the attention that CPPIB’s investment in now-bankrupt EMI drew (see prior post “EMI’s bankruptcy pain felt in Canada” Feb 2-11), it appears we’ve got more than one big PE position underwater. However, as I noted on EMI “this is simply an expected bump [along] the road in the universe of alternative managers for any large asset manager.”

Now, if we could only get better transparency about our various investment strategies, I wouldn’t have to do this back-of-the-envelope analysis for you (see prior post “CPPIB should take a page from Oregon’s book” Sept 12-10). In the meantime, it’ll have to do.

When the NDP calls for the CPPIB to manage a new retirement savings program on behalf of working Canadians, do they have any idea that more than $30 billion (21% of CPPIB’s current assets under management) is already committed to LBO firms and deals like SunGard? That’s higher than the likes of the Yale or Harvard Endowments, two of the Grandaddies of institutional PE investing (see prior post “Supersized private equity allocations at CDP and CPPIB?” Feb 10-09).

Some deals work out, and some don’t. That’s the nature of the beast. But let’s have better transparency.

MRM
(disclosure – I own GS)