By David French
(Reuters) – Calpine Corp’s $16.4 billion sale to Constellation Energy is set to generate a handsome windfall for the power producer’s owners, but has also stoked hopes within the private equity world that similar mega-exits may help an industry struggling to return investor cash.
The trio of investors – Energy Capital Partners (ECP), Canadian pension fund CPP Investments and Access Industries – and their limited partners are expected to pocket a return of around four times their original outlay, according to people familiar with the matter.
Not only was the Jan. 10 agreement the largest transaction in the U.S. power industry in nearly two decades, but the Calpine owners are also set to reward investors holding significant positions in their portfolios. In the case of ECP, liquidating around a quarter of its $5 billion third flagship fund, as well as stakes in other ECP vehicles, two of the sources said.
This type of mega-exit is rare in the buyouts world: only 27 sales worth more than $10 billion were struck between 2020 and 2024, out of almost 2,900 U.S. companies divested by private equity in the time period, according to data provider Dealogic.
Among the few in 2024 were GTCR and Apax Partners’ deal to sell insurance brokerage AssuredPartners to Arthur J Gallagher for $13.45 billion, and Home Depot’s $18.25 billion purchase of hardware supplier SRS Distribution from Leonard Green & Partners and Berkshire Partners.
Such large deals are gaining greater significance, though, amid the money management industry’s struggles to offload bets made during the boom years of the late-2010s and into the early part of this decade, according to several private equity investors and advisers interviewed by Reuters.
With the overall dealmaking environment expected to be favorable in 2025, industry participants are hoping even a small increase in such transactions could help improve the recycling of capital and head off impatient investors.
“It’s looking like 2025 is going to have a lot of the right conditions,” said John Grand, co-head of the corporate practice at law firm Vinson & Elkins.
“Public equities feel like they are somewhat overvalued, so people are looking for private deals. Interest rates are coming down, and you also have political predictability for the next few years.”
GOLDILOCKS DEALS
The upbeat thinking comes after a lean couple of years for exits. Many sale processes failed amid a disconnect in price expectations between buyers and buyout firms wanting top dollar for assets – often bought during the period of historically low interest rates, when debt was cheap and valuations soared.
For the largest deals, this environment compounded the fact they are harder to accomplish in the first place, given the limited universe of buyers. While an initial public offering (IPO) is an alternative, sellers can exit their investment immediately, rather than having to hold a sizable stake in publicly traded companies for several months or years.
“Strategics only do deals at certain times, so the stars aligned around the Constellation deal, and we will achieve most of the IPO upside but with reduced execution risk,” said Tyler Reeder, president and managing partner of ECP.
Pressure to reward LPs is increasingly prominent. The ratio of exits by private equity versus new investments fell to a record low in 2024, while at the current pace it would take eight years for buyout firms to exit their existing U.S. portfolios, according to data from PitchBook.
Against this backdrop, larger deals can be more efficient in returning cash versus the time needed to execute multiple smaller investments.
“DPI is a priority for LPs right now, so being able to strike an all-cash deal of this magnitude is meaningful and appreciated by investors,” said Aaron Cohen, head of financial services & technology at GTCR, of its AssuredPartners deal.
Distributions to paid-in capital (DPI) is a metric that evaluates money managers in terms of how much cash is returned to investors.
GTCR earned around 2.5 times its original investment made in 2019 when agreeing to sell AssuredPartners, according to a source familiar with the matter.
Although mega-exits are highly prized, an increase in those transactions may not be a panacea for the industry, given that they are complicated to pull off.
“They are Goldilocks transactions,” said Bill Nelson, a partner at law firm A&O Shearman.
(Reporting by David French in New York; Additional Reporting by Isla Binnie in New York; Editing by Matthew Lewis)
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