The deals that show how lucrative private equity deals can be

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a former investment banker and author of “Power Failure: The Rise and Fall of an American Icon”

It’s been a rough year for private equity firms. The highest interest rates in more than a decade have combined with relatively high inflation and led to a disconnect between buyers and sellers. Without a meeting of those two minds, it’s tough to get deals done. The numbers bear that out.

According to S&P Global, in the first nine months of 2023 global private equity investments had an aggregate value of $365.3bn, a decline of 44 per cent year over year. The number of private equity deals fell 36 per cent to about 13,000.

In fact, a bit of a surprise, the biggest private equity deal of the year — the roughly $15bn buyout of Toshiba Corporation — is happening in Tokyo, not New York, and involves Japan Industrial Partners and not any of the typical American buyout stalwarts, such as Blackstone, KKR and Apollo. But the paucity of new deals in 2023 will no doubt be temporary. For why, just take a look at two of the most successful private equity deals of all time.

The scale of the profits on one of those came to light this year — the move to take Dell Technologies private and then subsequently buy and sell VMware, a cloud computing company, by Silver Lake Partners and billionaire Michael Dell. In November, Dell and Silver Lake completed the sale of VMware to Broadcom for $92bn, reaping part of an astounding windfall of $70bn for Dell, Silver Lake and their investors from the combined transactions, according to Financial Times calculations. 

I also have been following another remarkable deal, the Brazilian-American firm 3G’s 2010 buyout and transformation of Burger King into Restaurant Brands International, which has yielded 3G nearly $19bn on its initial $1.6bn equity investment.

Both deals needed a decade or more to gestate and both required a fair amount of risk and vision. But let’s focus on the 3G deal. In 2009, like countless other private-equity hopefuls scouting for deals, 3G partner Daniel Schwartz screened a bunch of undervalued companies. He came across Burger King.

At the time, the company was publicly traded after having been taken private by buyout firms TPG, Bain Capital and a division of Goldman Sachs, which together still owned 32 per cent of the stock. In 2010, led by 3G partners Schwartz and Alex Behring, 3G bought Burger King for $4.1bn, including debt. At the time, there was one brand — Burger King — with a network of 12,000 outlets across 70 countries. So-called system sales from all the outlets that used the brand were $15bn.

Since then, 3G has worked some kind of magic. Schwartz joined the company as its chief financial officer (and was named chief executive in 2013) and Behring became executive chair of the board. It’s rare for buyout partners to become executives of the companies they own. Cutting costs, 3G sold off the 1,300 company-owned restaurants to franchisees. It expanded overseas, into China, Brazil and France, among other countries.

In 2012, Bill Ackman convinced 3G to merge with Justice Holdings, a UK special purpose acquisition company, sponsored by the hedge fund manager, Martin Franklin and Nicolas Berggruen. That deal valued Burger King at $8.1bn including debt; 3G received another $1.8bn in cash from the Spac deal and earlier capital return while continuing to own 71 per cent of the company.

Then 3G went on an acquisition spree. In 2014 Burger King, soon to be renamed Restaurant Brands International, bought Canada’s beloved Tim Hortons for nearly $12bn, including $3bn of financing from Warren Buffett’s Berkshire Hathaway. In 2017, Restaurant Brands bought Popeye’s Louisiana Kitchen for $1.8bn in cash to get into the chicken sandwich game. And in 2021, Restaurant Brands paid $1bn in cash for Firehouse Subs.

In February 2023, the Restaurant Brands board selected insider Josh Kobza as its new chief executive to take charge of a company that now has more than 30,000 outlets in more than 100 countries that take in some $40bn in system sales.

After 13 years of ownership, 3G has realised $11.4bn so far and still owns 27 per cent of the company, worth $9.2bn. That represents nearly $19bn in gains, making the deal one of the most profitable ever for a single buyout firm. “There’s been a lot of value created,” Schwartz told me. “But we’re not going anywhere and I think there’s a whole lot more value to be created. I love the business.”

There’s no question private equity dealmaking will rebound, if for no other reason than the ungodly amount of money that can still be made if it is done right.