The U.S. private equity heavyweights set to take over DBRS Inc. have set their sights on international growth for the Canadian credit rating agency.
Carlyle Group LP and Warburg Pincus LLC said Monday that they would acquire DBRS, with plans to invest in the business, potentially bringing on new employees to fuel growth. Terms of the deal were not disclosed, but the transaction is reportedly worth about $500-million (U.S.), and is expected to close in February or March next year.
To these foreign players, DBRS offers stable cash flow from its Canadian business, where it is best known. But another pull was the opportunity to grow in the U.S. and Europe, where the financial crisis spurred regulators, investors and other stakeholders to seek a more diverse pool of ratings, according to a person familiar with the transaction.
DBRS has a 2 per cent market share in the oligopolistic business of credit ratings, with Moody's Investors Service Inc., Standard & Poor's Corp. and Fitch Ratings Inc. eating up the lion's share of the business. The challenge now is to find opportunities to grow that are less competitive than the corporate debt space in the U.S., the person said. These areas could include ratings of commercial and residential mortgage-backed securities.
There may also be opportunities for DBRS to expand its business farther into information services and data analytics, an area that could compliment the traditional ratings business, and where other players such as Moody's have grown in profitability.
The U.S.-based investment firms intend to keep DBRS headquartered in Toronto, since Canada is still the dominant source of revenues. DBRS's founder Walter Schroeder, who formed the business in 1976, will retain a stake in the business as an investment partner. The deal also includes investment contributions from other unnamed Canadian individuals.
"While our Canadian franchise and culture will continue to be at the core of DBRS' operations, the breadth and depth of both Warburg Pincus and Carlyle's international presence will be invaluable to DBRS at it seeks to capitalize upon its growing platforms in the United States and Europe," said Mr. Schroeder in a statement.
Both firms have been active in Canada in the last year.
Washington-based Carlyle Group, which has $203-billion in assets under management, has built up its Canadian presence by forging connections to institutional investors. In November, 2013, the firm bought Toronto-based asset manager Diversified Global Asset Management Corp., which is focused on selecting hedge funds for pension funds and sovereign wealth funds, for more than $100-million (U.S.).
Carlyle's investment in DBRS will be held in Carlyle Global Financial Services Partners II, a sector-specific buyout and investment fund formed in 2011.
Olivier Sarkozy, head of the financial services team at Carlyle said the company would "continue the build out of the DBRS platform on a global basis."
"The world needs more global ratings franchises that issuers and investors alike can count on to provide timely and insightful ratings on a consistent and impartial basis. As the world's fourth largest agency we believe DBRS is ideally suited to fill that void," said Mr. Sarkozy. Mr. Sarkozy has worked on several multibillion-dollar bank deals, including CIBC's $2.9-billion (Canadian) capital raise to buoy its balance sheet in early 2008 amid losses from the collapsing subprime mortgage market.
New York-based Warburg Pincus, with $37-billion in assets under management, is one of several private equity groups that has built up its investments in Canada primarily in the oil sands over the last decade, where it now has more than five energy investments, such as Canbriam Energy Inc. and Osum Oil Sands Corp. The company invests across many asset classes, including healthcare, technology and financial services.
The firm will make its investment through its $11.2-billion Warburg Pincus Private Equity XI fund.