When private equity giant Carlyle Group was working to buy debt manager CBAM earlier this year, it was locked in a bidding war with an unheralded US-based buyout firm named Clearlake Capital. Though Clearlake flinched at the $787mn price, leaving Carlyle to win the auction, it led to a far bigger prize.
During the negotiations, Clearlake’s two billionaire co-founders, José Feliciano and Behdad Eghbali, grew close to Todd Boehly, the founder of Eldridge Industries, which owns CBAM and scores of other businesses including a stake in the Los Angeles Dodgers baseball team.
On Friday, Boehly and Clearlake agreed to buy Chelsea FC for more than £4.25bn, prevailing in a fiercely contested battle for one of the biggest sports deals ever.
While Boehly led the group, which includes Swiss billionaire Hansjörg Wyss, Guggenheim Partners chief executive Mark Walter and Daniel Finkelstein, a UK Conservative party peer and Times newspaper columnist, Clearlake is funding more than half of the purchase price and holds joint governance rights.
Clearlake is financing the purchase out of its private equity funds, an unusual manoeuvre that will put a sizeable piece of the football club in a structure with a finite life, though they could add more financial partners.
For Clearlake, Chelsea is the most prominent deal in what has been one of the buyout industry’s least known success stories. The Santa Monica, Calif.-based firm manages more than $75bn in assets and has taken in $25bn in new assets over the past year, including a new $14bn flagship buyout fund.
“Clearlake has continued to be one of the best performers in our private markets’ portfolios,” said Shawn Wooden, Treasurer of the State of Connecticut, which has invested over $500mn with the firm.
Flagship funds that Clearlake raised between 2013 and 2018 have earned net returns of between 34 per cent and 56 per cent, according to public pension fund disclosures, putting them in the industry’s top quartile. The $12.6bn Clearlake has invested across its first six flagship buyout funds was worth over $27bn as of mid-2021, according to a public review released by Connecticut.
Founded in 2006, Clearlake is one of the most active buyers of midsized companies in the US. It targets specialised but highly profitable companies in the consumer goods, industrials, and tech sectors that it grows through debt-financed acquisitions. It also employs outside operational experts to advise on strategies to bolster profits.
It has struck more than 100 acquisitions since the beginning of 2020, including half-a-dozen takeovers of publicly traded companies, according to Refinitiv data.
Clearlake finances about two-thirds of the purchase price of its takeovers using debt, say bankers who have worked with the firm.
Its 2014 acquisition of telecom services company ConvergeOne for under $100mn was grown by a handful of acquisitions before the business was taken public and sold to buyout firm CVC Capital Partners for $1.8bn. The deal made Clearlake a tenfold return, after accounting for more than $700mn in debt the company took on to make acquisitions.
Clearlake’s most successful deal was its $180mn carve-out of healthcare software company Provation from conglomerate Wolters Kluwer in 2018. After striking four acquisitions, Clearlake sold the business to Fortive last December for $1.43bn. Because Clearlake financed its purchase using debt, it made more than 20-times its money.
“The firm’s flexible, all-weather strategy allows the Clearlake investment team to identify, and execute on attractive investment opportunities across varying market conditions,” said Wooden. “It is a competitive differentiator.”
Feliciano and Eghbali met in the mid-2000s while working to salvage two investments. At the time, Feliciano worked at distressed debt investor Tennenbaum Capital, while Eghbali handled buyouts at TPG. While the deals didn’t amount to much, the two bonded.
Feliciano, a native of Bayamón, Puerto Rico, came to the US in 1990 to study engineering at Princeton, having never visited campus nor spent much time in the US. Eghbali’s family left Iran for California in 1986 and he studied business at the University of California, Berkeley.
In 2006, the two formed Clearlake with a strategy to pivot between buyouts and distressed investments depending on economic conditions. They raised early capital by tapping “emerging manager” programmes at endowments and pensions but struggled to hit a $500mn fundraising target.
The mandate allowed Feliciano and Eghbali to shift from buyouts to distressed investments during the 2008 crisis. When the recovery took hold, they pivoted back. Clearlake’s inaugural fund generated a 15 per cent net return.
Not every deal is a winner. Clearlake has a 9 per cent loss ratio, pension documents show, and struggled with some energy-exposed investments.
Feliciano typically focuses on industrial and consumer deals, while Eghbali handles software and technology. Both dealmakers work nonstop, said one confidant.
Recently, Clearlake has become Wall Street’s biggest user of “GP-led secondaries,” a new technique that is a booming market in private equity. In these deals, Clearlake will find a private equity firm to buy a large portion of one of its existing investments and offer investors a chance to sell at the new valuation, or roll their stake into a new fund that will hold the investment for about four more years.
It discovered the technique during the pandemic, selling a piece of software company Ivanti to TA Associates in August 2020 at a $2bn valuation that generated a big windfall. Many investors chose to roll their holdings instead. A year ago, a third buyout firm, Charlesbank Capital, invested in Ivanti at a valuation two times higher than the 2020 deal.
“Their team is really good at unlocking that hidden value quickly, and once they do, they are very good at monetising that early gain in creative, innovative ways,” said Ian Charles, a confidant who founded Arctos, an alternative investment firm.
“It locks in a gain for the legacy fund but allows the manager to retain exposure to the growth of an attractive investment,” added one banker of the deals. “For a firm in growth mode, it also gives Clearlake the ability to retain assets under management,” said another.
Clearlake has struck five continuation deals, raising $8.5bn in assets, and realising over $10bn in investments in the past two years.
Besides buyouts, both billionaires are known as some of the biggest backers of new minority-led investment firms with their own money. They have funded and mentored nearly 100 firms, particularly through an over $50mn effort called the Supercharged Initiative, led by Feliciano and his wife Kwanza Jones.
“When you look back five or 10 years from now, you are going to see a derivative growth of diverse investment managers started with José and Kwanza,” said Adam Demuyakor of Wilshire Lane Capital, which they backed. “There is almost a generational tree that has grown off of their efforts.”
Feliciano and Eghbali have set their sights on the sale of the National Football League’s Denver Broncos, a potentially larger deal than Chelsea and one they are bidding on with their own money.
Both sit on a valuable asset, their combined 80 per cent ownership of Clearlake. In 2018, they sold a stake in the firm to investors at a $4bn valuation and used the proceeds to invest hundreds of millions of dollars into Clearlake funds. The firm’s value has since soared and Forbes values both billionaires at $3bn each.
Bankers have been pitching to take Clearlake public, an option the firm is studying but has made no decision on.
“Wouldn’t this be the next tool in terms of value creation? If anyone is going to do it, it would be someone like Clearlake,” said one banker.
With additional reporting from Sam Agini and Kaye Wiggins in London