KKR in talks to buy stake in Veritas business valued at close to $11bn

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Veritas Capital was in talks to sell a 50 per cent stake in healthcare technology company Cotiviti to private equity giant KKR, in a deal that would value the business at up to $11bn, according to three people briefed on the matter.

A deal, which could be clinched in the next few weeks, would return billions of dollars to Veritas investors after a similar deal for Cotiviti fell apart in April when another bidder, Carlyle, failed to come up with its part of the investment.

The prospective deal comes as private equity firms such as Veritas look for ways to sell down big, successful investments like Cotiviti and return cash to their investors. Veritas will sell 100 per cent of the company from the funds that originally invested in Cotiviti in 2016 and 2018. A newer $10.7bn fund that Veritas raised last year would then, in effect, buy back half of the company from KKR, according to sources briefed on the matter.

That would leave Cotiviti roughly half owned by KKR and half owned by Veritas, the sources said.

The structure is meant to provide the original investors in Cotiviti with a full cash return on their investment and avoid a so-called continuation fund, a novel structure where a private equity fund sells a stake in one company to a new vehicle created to hold the investment. These increasingly popular structures have proven controversial among investors because they can create conflicts such as adding additional fees for the pensions and endowments that invest in private equity funds.

KKR and Veritas declined to comment.

The deal may not have captivated the market earlier this year if not for the mammoth $5.5bn loan that private credit investors had pieced together, which edged out the banks that traditionally provide debt for leveraged buyouts.

The loan — the largest direct loan then contemplated by the burgeoning private credit industry — along with a $1bn preferred equity investment and more than $6bn of new equity invested by Carlyle and Veritas would have valued Cotiviti at close to $13bn.

A rally in credit markets this autumn has given Veritas and KKR a greater number of options as the two private equity firms look to finance the transaction. The two have sounded out banks and private credit funds to finance the debt portion of the deal. Competition is expected among the two camps given the strong trading activity in Cotiviti’s outstanding loans.

Banks at the start of this year broadly stepped back from committing to new leveraged buyouts, with their appetite dented by fears of an economic slowdown as well as the uncertainty around how a fast-moving banking crisis could metastasise. Their reluctance to lend meant the industry ceded market share to private credit investors including Ares, Apollo, Blackstone and Sixth Street.

That appetite is beginning to return as banks look to bolster relatively modest advisory and lending revenues, and as they grow more confident that companies and private equity groups will be able to weather a slowdown.

The talks were reported earlier by the Wall Street Journal.