As lockdowns gripped Europe in late 2020, KKR was battling to plant its flag in one of many pandemic’s profitable industries.
The personal fairness pioneer misplaced out that yr in its bid for German street bike maker Canyon, a darling of Instagram. However bankers later pitched KKR’s dealmakers a comfort prize: Accell, a much less modish Dutch producer.
It led to an funding that might develop into one of many New York buyout big’s worst in Europe.
KKR launched a €1.8bn bid to take Accell personal with the backing of its largest shareholder, Teslin, in January 2022. That month marked the zenith of a deal increase fuelled by low-cost cash and optimism about how the pandemic would spur the adoption of latest know-how and completely change each work and leisure habits.
By August when Accell delisted from the Amsterdam inventory trade, central banks have been battling to comprise inflation with rate of interest rises, whereas shoppers have been squeezed by hovering vitality prices within the wake of Russia’s full-scale invasion of Ukraine. The dealmaking increase was over.
Lower than two years later, Accell discovered itself struggling below the burden of its money owed as a post-pandemic gross sales droop left it burning by money. The bikemaker had little selection however to show to its lenders for assist. Final month, Accell lastly closed a restructuring deal that supplied a lifeline, chopping €600mn from its €1.4bn debt load.
However for KKR and Teslin, which had retained a minority stake in Accell, the value of that reprieve was steep. Although they stored management of the corporate, the duo needed to hand roughly 20 per cent of the shares in Accell to a bunch of lenders, and KKR needed to write down the worth of the €1.1bn fairness funding it had made solely 30 months earlier.
The 2 companions who led the deal for KKR are now not on the agency, though an individual acquainted with the circumstances mentioned their departures have been unrelated. Subsequent month, Accell can be on to its third chief govt of KKR’s possession.
Past the deal’s implications for KKR, Accell’s woes supply an early style of the ache that will lie forward for personal fairness teams that piled right into a trillion-dollar dealmaking increase between late 2020 and early 2022. Many buyout executives and buyers now say the wave of offers may very well be among the many worst within the {industry}’s historical past.
“There’s going to be an actual reckoning for the pandemic-era classic,” mentioned Dan Rasmussen, founding father of Boston hedge fund Verdad.
The quiet roads and spare time afforded by the Covid-19 lockdowns lit a small fireplace below Europe’s biking {industry}, serving to to push Accell’s gross sales 17 per cent greater to €1.3bn throughout 2020.
When KKR and Teslin launched their bid at the beginning of 2022, they believed there was nonetheless room to enhance the enterprise. Accell had already been on an acquisition spree, shopping for manufacturers within the UK, Nordics, France and Germany. However KKR noticed avenues for development — as nicely for chopping prices by integrating operations and squeezing higher phrases from suppliers, in accordance with individuals with information of the matter.
The timing was unlucky, and issues shortly grew to become troublesome.
An govt at a rival buyout group mentioned that they had steered away from Accell as a result of they believed the enterprise was “benefiting from a increase that will not final”. One other particular person acquainted with the enterprise mentioned KKR’s funding “wasn’t the wisest timing”, including that the agency “purchased the corporate at peak.”
KKR had anticipated dwindling demand for conventional bikes after the pandemic, and in 2022, Accell’s conventional bike gross sales fell by 4 per cent. However the US personal fairness home noticed a vivid future in e-bikes, the place Accell was a market chief.
That yr, nevertheless, Accell’s e-bike gross sales development was decrease than anticipated, as provide chain disruptions led to shortages of some key parts. And the buyout group had underestimated simply how a lot the corporate had over-ordered different elements in response to heightened pandemic demand.
Inventories ballooned. Accell’s parts retailer climbed by 50 per cent to €540mn in 2022, its accounts present, and its assortment of completed bikes and different merchandise virtually doubled to €380mn.
Accell was not alone in over-ordering. Producers throughout the {industry} ordered reams of elements within the “perception that [pandemic-era] demand would proceed post-Covid, which it didn’t”, in accordance with Kersten Heineke, a mobility {industry} guide at McKinsey.
To shift the inventory, Accell needed to supply up reductions in 2023. Revenues fell 10 per cent that yr. It slashed the worth of its stock, taking an impairment that despatched earnings from about €90mn in 2022 to a lack of €330mn.
By the center of 2023, Accell had turned to its shareholders to ask for extra money. KKR and Teslin would in the end lengthen the corporate some €300mn in loans earlier than the restructuring accomplished, together with €50mn when its Babboe cargo bikes, made for carrying youngsters, needed to be recalled due to security issues.
One lender, who was “very sad” with KKR over how the Accell funding performed out, mentioned it was “very uncommon” for a “prestigious” personal fairness agency to start out eager about restructuring a enterprise simply two years after shopping for it.
KKR had financed the take-private in 2022 with €1.1bn of fairness, topped up with €700mn of junk-rated debt taken on by Accell. By the point the lenders that underwrote the buyout mortgage on the time of the deal got here to promote it on in September 2022, they needed to settle for a deep low cost due to wider shifts within the debt markets.
Then, by June 2024, Accell was in restructuring negotiations after a nasty biking season compelled it to attract up a brand new marketing strategy.
After greater than 20 conferences between the advisers to Accell and the lenders, the corporate introduced in October that it had struck a deal and the working firm’s money owed could be lower from €1.4bn to €800mn.
KKR and Teslin needed to convert a sizeable chunk of their shareholder loans to fairness, in accordance with two individuals acquainted with the state of affairs, with the remainder reinstated. Along with the exterior lenders, the group kicked in one other €235mn to maintain the corporate going.
KKR mentioned it had been a “supportive shareholder” of Accell, “together with by a deep market correction that impacted the entire [bike] {industry}”. In a joint assertion with Teslin, it added that “along with the operational enhancements remodeled the previous yr and strengthened administration workforce”, the restructuring settlement “is a vital milestone in direction of enabling the supply of Accell’s strategic plan.”
Tjeerd Jegen, the outgoing chief govt of Accell, mentioned the corporate was a “scaled participant with a powerful portfolio of manufacturers and vital synergies to be achieved” that “will be capable to come out of the industry-wide downturn on a stronger footing.”
That rebirth could take some time. Ranking company Fitch famous final month that whereas the restructuring had materially diminished the corporate’s debt, and leverage ought to, over time, scale back to a extra sustainable degree, it noticed “excessive execution dangers” in Accell’s turnaround plan, given “the weak implementation of its earlier initiatives since 2022”.
The disillusioned lender agreed, noting that the corporate’s senior administration had modified incessantly in a brief interval. “KKR’s enterprise functionality within the bike manufacturing enterprise is just not that good,” they advised. And “nonetheless, it appears, that the market has not been recovering”.
As one of many first pandemic period personal fairness purchases to enter a full restructuring, Accell often is the canary within the European coal mine for the pandemic crop of personal fairness offers struck at excessive valuations. Extra within the US have already began to bitter.
“The hazard indicators of actual bother for this cohort of offers can be longer maintain instances and extra amend and lengthen debt offers,” mentioned Rasmussen of Verdad.
A report revealed earlier this month by consultancy Bain & Co noticed the similarities between Covid-era vintages of personal fairness fund and people launched instantly earlier than the worldwide monetary disaster.
“These vintages took over 9 years, on common, to return capital to buyers”, Bain famous: two years longer that the traditional personal fairness fund lifecycle. The sample raises “fears that the capital lodged in present portfolios will take equally lengthy, and even longer, to pay again”, Bain mentioned.
The exceptionally massive funds raised in the course of the fever of 2021 and 2022 and the lofty costs they paid for belongings add to the stakes.
As Bain put it, “What historical past tells us is that durations like this take time to unwind.”