Private equity funds sell old economy holdings as market rebounds

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In the cyclical steel industry, Alan Kestenbaum is the definition of smart money.

The private equity investor has spent his career turning around rust belt companies. He bought Stelco Holdings Inc. out of bankruptcy in 2017, took over as chief executive and since made a 300-per-cent-plus return on a $350-million investment.

So what’s the smart money doing these days? Cashing in.

Mr. Kestenbaum’s firm, Bedrock Industries L.P., sold $184-million of Stelco shares last week, in a bought deal led by BMO Capital Markets. Bedrock continues to hold a stake in the steel maker worth $880-million. It was the latest example of private equity companies taking profits on stakes in industrial businesses that have seen their value soar in recent months, as work forces adapted to producing in a pandemic.

Last March, as blue-collar businesses grappled with the impact of COVID-19 on their operations, Stelco’s stock sank to $3 levels on the Toronto Stock Exchange. The company rejigged its facilities, rebuilt blast furnaces and kept turning out steel. The stock price soared. Bedrock sold Stelco shares last week at $26.25 each.

Onex Corp., one of Canada’s largest private equity fund managers, raised US$229-million last week by selling a portion of its position in door and window maker Jeld-Wen Holding Inc. NYSE-listed Jeld-Wen, which is based in North Carolina, saw its share price triple over the past 12 months, as the North American housing market boomed.

Brookfield Business Partners LP, the private equity arm of Toronto-based Brookfield Asset Management Inc., pulled in US$340-million last week by selling shares in GrafTech International Ltd. Morgan Stanley led the offering. Ohio-based GrafTech produces graphite used in steel making, and its stock price has almost doubled since last March. In the past four months, Brookfield Business Partners sold three large blocks of GrafTech stock.

For private equity funds, cashing in long-held investments unlocks a key source of profits, the carried interest on holdings that is only paid to the manager when a business is successfully sold, and performance thresholds are met. When the pandemic first swept through North America last spring, shares in Onex and Brookfield Business Partners sold off sharply, in part on expectations the managers’ performance would fall short of benchmarks, and they would miss out on carried interests.

Since then, both fund managers have seen their stock prices rally, as they sold stakes in businesses such as Jeld-Wen and GrafTech. In a recent report, analyst Geoffrey Kwan at RBC Capital Markets predicted Brookfield Asset Management will crystalize US$1-billion of carried interests over the coming year, and said the company “plans to be active monetizing assets.”

After Onex released year-end results in late February, analyst Phil Hardie at Scotia Capital said in a report that the Toronto-based company was now positioned to generate carried interests from its funds, which would “improve investor confidence ... and position it well for its next round of fundraising.”

In 2020, Onex pulled in a total of US$2.7-billion from selling holdings or cash distributions from businesses it owns, while Brookfield Business Partners generated US$1.1-billion from stock sales and distributions.

And what does the smart money do when it cashes out of an old economy holding, such as Stelco? If you’re the Brooklyn-born Mr. Kestenbaum, you dive into SPACs, or special purpose acquisition companies, the hottest thing in U.S. capital markets. And you look past the rust belt for new opportunities.

Stelco’s CEO is a minority owner of the NFL’s Atlanta Falcons. Mr. Kestenbaum led a group that raised US$230-million in January for a NASDAQ-listed blank cheque company called Sports Ventures Acquisition Corp. The newly minted SPAC is now trying to buy a private business in the sports, media or entertainment sectors.

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