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LPs Lost in the PE Shuffle?
Anne-Sylvaine Chassany of Bloomberg reports, Private Equity `Pass-the-Parcel' Deals Leave Investors in Lurch:
What
happens when a private equity firm sells a company it owns to another
private equity firm? While the managers of the sale collect a fee and a
profit, some of their investors are concerned the sales will hurt
returns.
Cinven Ltd. reaped a 70 percent
profit on its investment by selling German academic publisher Springer
Science+Business Media GmbH in December. Danish pension manager ATP, one
of the leveraged buyout firm’s backers, isn’t sure what it’s made.
ATP
is also an investor in EQT Partners AB, the Stockholm- based firm that
acquired Springer in a transaction valued at 2.3 billion euros ($3.1
billion). The Copenhagen-based company, which oversees about 6 billion
euros in private equity funds, is one of a growing number of investors
who are, in effect, selling companies to themselves in so-called
secondary buyouts.
“It takes returns away from the investors who
are in both the selling and buying funds,” Soren Brondum Andersen, a
partner at ATP Private Equity Partners, said in an interview. “There are
significant fees,” he said. “It’s also difficult to generate 10 times
your initial investment the second or third time” a company is acquired.Secondaries accounted for a record 46 percent of all leveraged
buyouts in Europe by value this year, according to London-based research
firm Preqin Ltd.
Dealmakers can net between 2 percent and 5 percent of
the purchase price in fees, according to Andersen. Based on his
estimate, private equity managers made as much as $1.8 billion in fees
from the $35.3 billion of secondary buyouts announced globally this
year.
KKR, BC Partners
Firms from New York-based KKR & Co. LP
to London-based BC Partners Ltd. are buying companies from one another
as they rush to invest $470 billion of capital they amassed before the
credit crisis cut off the debt financing they rely on to fund their
acquisitions. Firms typically have five to six years to invest
investors’ pledges to their pool. They’re also seeking to sell assets
they were forced to retain as the credit crisis also brought the pace of
initial public offerings to a halt.
Firms
have announced 128 secondary LBOs worldwide this year valued at $35.3
billion, up from $9.9 billion for all of last year, according to Preqin.
Private equity funds raised $57 billion in the third quarter, 16
percent more than in the previous quarter, when commitments fell to a
seven-year low, according to Preqin.
‘Still Own The Asset’
In
North America, secondaries account for almost a fifth of all buyouts by
value this year, more than twice the level of three years ago.
“I
am concerned this is an increasing trend,” said Rhonda Ryan, head of
the European private-equity funds group at Pinebridge Investments, a
former unit of insurer American International Group Inc. that has about
$18 billion in the funds. “Investors don’t necessarily like being on
both sides of those deals because we pay fees and carried interest, and
we still own the asset.”
In cases
where investors are in both the selling and the buying funds, they
technically receive a cash distribution from the first and a call on
their undrawn commitments from the second.
No-one can precisely
distinguish the “pass-the-parcel” deals from the rest, and they are
becoming increasingly prevalent, said Neil Harper, managing director at
Morgan Stanley’s private equity funds of funds unit in Europe.
‘Superior Insight’
“You
either have a superior insight, specialization, an angle that helps you
pay a little more than the others, or you nudge the debt package and
pay a higher price because you need to invest,” he said. “The concern is
that you have more of the latter than the former. This will affect
returns.”
Firms led 68 secondary buyouts in Europe and 56 in
North America this year, according to Preqin. Secondary deals are more
prevalent in Europe because private equity-backed companies can go
public more easily in the U.S. because of greater investor demand for
those assets and the existence of Nasdaq, which gives smaller and
high-growth companies access to public markets, said Celine Mechain, who
advises private equity firms at Goldman Sachs Group Inc. in Paris.
Bridgepoint
Capital Ltd., formerly NatWest’s private equity unit, sold U.K. pet
accessories retailer Pets at Home Ltd. to KKR in January after
considering an IPO. The sale valued the company at 955 million pounds
($1.5 billion), two people with knowledge of the deal said at the time.
Calpers’ Concern
The
California Public Employees’ Retirement System netted five times its
original investment from the deal, John Greenwood, private equity
portfolio manager for Calpers, said in a telephone interview from
Sacramento, California. The U.S. pension plan is also an investor in
KKR’s fund, he said.
“What we’re
concerned about is that large buyout firms aren’t able to deploy capital
into large deals and they are buying into smaller secondary buyouts and
paying more than they should,” Greenwood said. “I doubt KKR will be
able to deliver more than one-and-a-half or two times this time.”
In July, TPG Capital and Goldman Sachs’s private equity unit bought Belgian diaper maker Ontex NV
for 1.2 billion euros from Candover Partners Ltd., a British private
equity firm. TPG and Candover share investors including Calpers, the
Canada Pension Plan Investment Board, University of Texas Investment
Management and Swiss asset manager Partners Group, Preqin said.
Returns Similar
CVC
Capital Partners Ltd., which acquired U.K. vending machine operator
Autobar Group Ltd. in August, shares investors including the New York
State Common Retirement Fund and New York State Teachers’ Retirement
System with the seller, Charterhouse Capital Partners, according to
Preqin.
“Secondary buyouts are
almost of bubble of their own,” said Jon Moulton, who helped start the
funds that grew into CVC Capital Partners Ltd. and Permira Advisers LLP,
two of Europe’s biggest private equity firms. “If firms keep selling
assets to one another, how real are their prices? how real are their
returns?”
Overall, returns from secondary buyouts are
similar to primary deals, according to internal research by Pantheon
Ventures, an investor in more than 1,000 private equity funds. The
London-based firm declined to publish details of its internal study.
“One
should differentiate the pass-the-parcel deals, in which the buyer
doesn’t add value, and the transformational ones, which are producing
higher returns,” said Helen Steers, head of Pantheon’s European primary
funds group.
Investor Scrutiny
An official at
Cinven declined to comment on the Springer sale. An official at EQTdidn’t return calls seeking comment. Cinven and London-based Candover
formed Springer Science in 2003 by combining Kluwer Academic Publishers
and BertelsmannSpringer.
EQT said in a December statement it
plans to “drive the transformation” of Springer into “an online
scientific, technical and medical publisher as well as to further expand
the market-leading book publishing business.”
Investors’ are increasingly scrutinizing firms’ secondary buyouts, Pinebridge’s Ryan said.
“If they don’t perform, investors will not look at the fund manager favorably when it raises a new fund,” Ryan said.
Some fund managers say they are already taking note.
“I
don’t think our industry can create its track record by selling
companies back and forth to each other,” Permira Advisers LLP co-head
Kurt Bjoerklund said in a Sept. 29 interview with Bloomberg television.
“Ultimately there has to be an exit, either to public markets or to
industrial buyers.”
Sure sounds like a bubble in
secondaries. That's what happens when there is too much money chasing
too few deals. GPs are fleecing LPs but there are limits to these
shenanigans before the latter catch on and realize that they're being
duped. Private equity is still in a deep slump and that may change if
markets gain traction, but watching the nonsense going on in the
secondary market tells me that the old PE model is dead and only the
best funds will survive the coming shakeout.
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I work in a company that has be sold an bought 4 times over the last 5 years.
Each time we got sold, the asking price went up 30% to 50%.
1ste time we got sold: They sold all the buildings
2de time we got sold: They lowered all the stock levels
3th time we got sold: They restructured the firm and cut down 400 people
4th time we got sold: We where sold as "a concept". Everybody got a training scheme like you wouldn't believe.
The first asking price was 250million euro.
The last one payd over 700million. (without buildings, much lower stock levels in the warehouses, less staff,...)
We did a small under the radar valuation of the company and we calculated that the firm has a value of about +-200 million. And that would be Pré-crisis price.
classic. great story, SD. cheers.
...“I doubt KKR will be able to deliver more than one-and-a-half or two times this time"....
My heart bleeds for these poor people.
Kenneth Lay lives!
isn't churning customer accounts illegal?