August 7, 2020

Breakingviews: Blackstone adds to Ancestry’s dog-show lineage

by Breakingviews.

Genealogy website Ancestry has built a big business out of family trees. Its own is a bit like a show dog, with a long lineage of well-heeled, somewhat interchangeable-looking private-equity owners. Steady cash flow and an aging population explain its continuing appeal. The question for its latest handler, Blackstone, is whether a pandemic-related pop in users will have lasting charm.

Ancestry has a history of making its buyers money. After a short time as a public firm, it was bought by Permira in 2012 at a $1.6 billion enterprise value. Four years later, Silver Lake and Singapore’s GIC took majority control, at $2.6 billion.

Wednesday’s deal with Stephen Schwarzman’s firm ups that by 80% to $4.7 billion, with GIC retaining a 25% stake. The steadily rising valuations underplay how well the owners have done. Ancestry can handle leverage because many subscribers pay up front and heavy users tend to stick around.

The service is also steadily growing. It had 2.2 million users in 2016, but now has well over 3 million. The latest deal involves a bit over $2 billion of equity and the rest in debt, according to people familiar with its structure. With roughly $400 million of adjusted annual EBITDA, that puts its leverage pretty high. But the business isn’t very capital intensive, so that should be more than sufficient as a starting point to cover debt-service costs.

The pandemic-puffed purchase price means there’s always a chance Blackstone bought, well, a dog. New users may not stick around once lockdowns are lifted, presenting more exciting things to do. And private-equity inbreeding can carry a puppy-mill reputation, producing superficially attractive offspring with hidden deformities.

But Ancestry’s succession of blue-ribbon results suggests Blackstone will probably do reasonably well, as new users try the service, get hooked, and produce high and rising cash flow. With a bit of luck, there’s even a chance it may turn out to be best-in-show material.

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