Blackstone Group's up to $4.8 billion acquisition of a majority interest in Aon PLC's benefits administration and human resources unit has some industry insiders wondering what the giant alternative investment firm would want with a business as low margin as U.S. defined contribution record keeping.
But for The Blackstone Group LP, it's all about what new technology can do for companies.
The Aon Hewitt business unit might be its first record keeper, but Blackstone is no stranger to what it calls the technology-enabled services sector. Past investments include cloud-based human resources company Kronos Inc., global provider of financial services technology, data and analytics Ipreo Holdings LLC, cybersecurity firm Optiv Security, consumer transaction services company NCR Corp., supply chain and retail services company JDA Software Group Inc. and a German digital classifieds company Scout24 AG.
Aon is the second-largest investment Blackstone has made in three years and it is one of the biggest bets Blackstone has made in a technology-supported service company. It is also one of the first times Blackstone has taken a majority control interest in such a firm without a private equity partner.
Aon Hewitt was the fifth-largest DC plan record keeper with $377.15 billion in assets as of Sept. 30, 2015, according to Pensions & Investments' most recent survey of record keepers. It had 450 clients, according to the latest available data.
An Aon Hewitt spokeswoman at the time the deal was announced declined to comment on the size of the record-keeping unit in the context of the businesses being sold to Blackstone.
Blackstone is making the Aon investment out of its $18 billion flagship private equity fund Blackstone Capital Partners VII. Sources said Blackstone's equity investment could include limited partner co-investment.
The deal, set to close in the second quarter, is a classic carve-out — a leveraged buyout of a company's business unit, the management team of which will own a minority stake.
“These guys are the leading provider of human capital technology and administrative services,” said Peter Wallace, the New York-based Blackstone partner who led the transaction. “But it was not Aon's core focus. ... Aon is a brokerage first and a consultant second. It's not core to who they are and who they want to be.”
Mr. Wallace declined to detail the size of the Blackstone Capital Partners VII equity investment or the amount or type of leverage used. Blackstone will pay a total of $4.3 billion when the deal closes and up to another $500 million based on future profits. Sources close to the transaction said that additional payment would come out of Blackstone's share of the profits and not out of the fund capital.
Blackstone executives see a significant opportunity to invest in technology focusing on retirement, health care and human resources innovation, Mr. Wallace said.
The plan is to “invest more, innovate more and be more productive” over a number of years, he said.
However, the Aon unit is not a “fixer upper,” he noted. “We think it's a great franchise that was invested in over decades.”
Currently, the business services the very largest companies. Blackstone sees an opportunity to expand the business' reach to smaller companies — going from Fortune 200 companies to Fortune 1000 companies, he said.
Aon continued to invest in the business after it acquired Hewitt Associates Inc. in 2010, he added. Blackstone executives expect to make further improvements to accelerate the business' growth.
“There is a significant need for technology-enabled administration and servicing of retirement, health care and human resources,” Mr. Wallace said. “What's more important than making sure you are getting the best possible administration of health-care benefits and retirement benefits?”
One exit strategy is to eventually take the stand-alone company public.
“This could be a public company at some point in the future,” Mr. Wallace said. “Hewitt was a public company before Aon bought it.”
Blackstone is making its investment in Aon early in the new fund's investment period. Blackstone Capital Partners VII closed in December 2015, and Blackstone executives started investing fund capital last year, he said.
Blackstone VII was the largest fund closed in 2015, according to data from London-based alternative investment research firm Preqin substantially. The fund exceeded its $15 billion target, and was 20% larger than the prior fund. Most of the capital for the fund was raised in seven months.
Some institutions made sizable bets on Blackstone's latest flagship private equity fund. Investors that committed $500 million each include the $308 billion California Public Employees' Retirement System, Sacramento, and $186 billion New York State Common Retirement Fund, Albany. The $133.2 billion Texas Teacher Retirement System, Austin, committed $450 million to the fund and another $100 million to a co-investment vehicle.
“Instead of trying to gain more scale, Aon Hewitt has said it is going to focus on core services like consulting, which generates larger profits,” said Stephen Lee, partner in the Los Angeles office of law firm Goodwin Procter LLP. Mr. Lee focuses on private equity-backed mergers and acquisitions.
As to why Blackstone would want a lower-margin business, Mr. Lee noted Blackstone executives have “excelled in identifying and creating operational improvements.”
And Blackstone executives likely see other areas in which they can improve margins at Aon Hewitt, Mr. Lee said.