How KKR Made a ~3x Return in 4 Years by Investing in Research Tools

How KKR Made a ~3x Return in 4 Years by Investing in Research Tools

February 26, 2020

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KKR made headlines late last year with the exit of their investment in LGC Group, a UK-based biochemical standards and reagents provider. Sources say KKR acquired LGC in December 2015 for roughly ~£650 million and sold LGC to a consortium of funds for a 3x return in November 20191,2. In 2015, LGC had revenues of roughly ~£225 million and grew those revenues, both organically and inorganically, to ~£450 million in 20192,3. This exit has drawn a lot of attention to the markets sitting upstream of newer drug and diagnostic development programs expected to reach an inflection point. Going forward it will be interesting to see the shift in the competitive landscape and the final returns of other private equity firms currently participating in these upstream markets.When KKR completed the acquisition, LGC was a provider of genomics reagents, sample analysis kits, and reference materials. Though the business did well, LGC did not particularly provide high-value services, they operated more as a base materials supplier. Through KKR’s holding period, 15+ deals were closed in order to focus on building LGC’s oligonucleotide and quality assurance capabilities. As a result, LGC benefitted from the fast-growing end markets of cell/gene therapies and diagnostics without actually taking on the risks of developing diagnostics or therapeutics. On top of this, KKR and LGC cultivated a stable business of providing reference standards to a variety of end markets, though they focused on the food and agricultural sectors. KKR drove value by transforming LGC from a biochemical reagents and reference standards provider to a high-value partner for biopharma and diagnostic companies. Today LGC enables R&D programs for oligonucleotide-based therapeutics and enables diagnostics development for its customers through their end-to-end offerings and their CDMO capabilities. LGC also forms an important part of QA/QC procedures in the food and agricultural sectors. A timeline and visualization of the deals publicly disclosed by LGC while under KKR’s ownership are shown below:[caption id="attachment_4023" align="alignnone" width="1010"]

Figure 1: A timeline of the publicly disclosed deals that LGC made under KKR's ownership[/caption]

[caption id="attachment_4020" align="alignnone" width="918"]

Figure 2: An illustration of the strategy behind LGC's acquisitions.[/caption]

Takeaways

Generally, private capital has trouble making good returns on investment in the therapeutics space due to the competition between sponsors and established pharmaceutical companies for high-value acquisitions. KKR has found a way to gain exposure to companies developing novel therapeutics in a space that, at the time, was not as crowded. LGC, through M&A activity, was able to build out high-value reagents, quality assurance, and manufacturing services for the cell and gene therapy space. On top of this, LGC was able to serve the fast-growing end market of diagnostics without assuming the risks faced by actual diagnostic companies. As a result, KKR was able to realize a phenomenal return. However, investors looking to enter these markets today do need to be wary of the changes in the competitive landscape in this area. Novel therapies and diagnostics have been generating lots of buzz and, as a result, various private equity firms have started to find ways to capitalize on this trend without directly investing in therapeutics companies.In 2014, GTCR formed Maravai LifeSciences with Carl Hull and Eric Tardif, industry veterans with extensive experience in the diagnostics and life science space. Maravai’s current portfolio is currently positioned to capitalize on the increasing demand for high-quality biochemical reagents, such as oligonucleotides and antibodies. In early 2017, TA Associates took a minority stake in Aldevron, a specialty manufacturer of plasmid DNA and proteins; in July 2019, EQT took ownership of Aldevron. Presumably, these investments were driven by growth in cell and gene therapies, therapies that require the use of plasmids and specialty enzymes. Due to PE’s current activity in these upstream markets and KKR’s recent high-profile exit, these spaces may become even more competitive and effectively lower future returns. However, KKR doesn’t seem to be too concerned as even they have doubled down with their recent formation of Gamma Biosciences, a platform company designed to provide bioprocessing capabilities for biologics. The diagnostics and life science spaces are still growing and present a diverse set of niche opportunities. As a result, novel and specialized upstream markets may be fertile ground for private capital looking for high-yield investments.References:

HARI JAYARAMAN

Hari is an analyst at DeciBio with a background in biochemistry and asset management. At DeciBio, Hari’s project experiences include life science market research, clinical diagnostics market research, and commercial due diligences. Connect with him on LinkedIn or email him at jayaraman@decibio.com.Disclaimer: Companies listed above may be DeciBio clients and/or customers

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