The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, May 7 (Reuters Breakingviews) - Sometimes old dogs are better off sticking with old tricks. CD&R, one of the oldest dogs in private equity, shows why. Its latest deal uses successful formulas out of a weathered playbook from yesteryear.

Long before buyout shops succumbed to the siren songs of private credit, mom-and-pop investors or the software industry, unsexy widgets were a staple of leveraged acquisitions. The same goes for carveouts, which present opportunities for more focused owners to spruce up unloved assets tucked inside bigger companies. Finding a new corporate buyer and turning a meaningful profit in short order were other private equity hallmarks that preceded today's stuck assets and continuation funds. CD&R, which opened its doors as Clayton, Dubilier & Rice in 1978, put all these vintage pieces together in a $5 billion industrial manufacturing sale this week.

The process began taking shape four years ago, when Roper Technologies offloaded a collection of pump and sensor makers as part of a broader makeover. After first taking $1.8 billion in cash out of the businesses, it sold a 51% equity stake for $829 million to CD&R, which subsequently tacked on $2 billion of debt, implying an enterprise value of about $3.6 billion.

With fresh financial motivation, managers boosted growth and profitability. CD&R sold one misfit piece to Honeywell HON.O for $670 million, bolted on other more suitable assets and rebranded the company as Indicor. The refurbished portfolio “fits like a glove” at Ametek AME.N, CEO David Zapico said on Wednesday. The $55 billion aerospace and medical device conglomerate he runs is buying the ensemble from CD&R, and expects it to grow at about 6% a year while squeezing out more than $100 million of annual cost savings.

Combine Ametek and Honeywell, and Indicor grew to an imputed $5.7 billion. Moreover, CD&R is keeping a meter-maker business bound to be sold before long, adding to the proceeds. Roper also agreed to pay the buyout shop $29 million a year in cash or as a chunk of the venture’s equity, and other goodies vaguely alluded to in public documents that probably help further improve an already chunky return.

Although CD&R is not alone with this sort of success story, private equity firms have largely struggled to return cash to investors in recent years. Some 32,000 unsold companies they own are getting moldy, with the average holding period now around seven years, according to consultancy Bain. The challenges have invited more creative exit paths while artificial intelligence causes fresh problems. There’s value in updating investment models, but the classics also rarely get old.

Follow Jeffrey Goldfarb on X and Linkedin.

CONTEXT NEWS

Industrial manufacturer Ametek said on May 6 that it had agreed to buy a portfolio of instrumentation businesses from Indicor for $5 billion in cash.

Private equity firm CD&R created Indicor after buying a 51% equity stake in a collection of assets from Roper Technologies in 2022 for about $830 million.

Ametek said Indicor Instrumentation generates about $1.1 billion in annual sales with profitability similar to its own. It expects to generate annualized synergies equal to 10% to 12% of the top line by the third year after completing the acquisition.