LONDON May 3 Two thirds of European private
equity activity this year has involved one buyout house selling
a company it owns to another, worrying investors that firms are
just recycling deals among themselves to trigger fees.
So far this year, 65 percent of the $19.3 billion of private
equity deals in Europe have been in the so-called secondary
market, according to data from industry tracker Preqin.
This is a higher percentage than in any of the last seven
years - last year 41 percent of deal activity was between one
fund and another - suggesting private equity managers are
increasingly struggling to find new direct investment
opportunities in Europe, while sellers face fewer exit routes.
In the secondary market, buyout houses flip companies
between themselves rather than selling them to trade buyers or
listing them on a stock exchange.
Selling to another private equity house can make sense if
the buyer has more resources for expanding the company, but the
practice can be unpopular with investors, who worry whether the
new owners can squeeze returns from an asset acquired for the
second or third time.
Some investors who have stakes in funds managed by both the
buyer and seller are also left holding the same asset, but with
a big chunk of fees and share of the profits removed in the
process of the deal.
"There are a lot of "friction" costs involved in the sale
and purchase - legal, bank, due diligence etcetera - which
someone, somewhere is ultimately paying for," one London-based
investor said, speaking on the condition of anonymity.
Private equity firms buy companies, try to boost their
profitability by cutting costs or shaking up operations, and
then sell them on in the hope of making a return.
But with firms eager to put cash to work before a fund
lifespan ends, and rivals keen to exit deals and return cash to
clients, chasing after assets in the secondary market can prove
easier than unearthing new direct investment opportunities.
Recent secondary deals include Investcorp's sale of its
German insulation firm Armacell to Charterhouse Capital
Partners, while on Friday Electra Partners said BC Partners had
made a $1.3 billion offer to buy animal identification company
Last month CVC returned to full ownership of German metering
company Ista, six years after selling the firm to its peer
Charterhouse at the height of the buyout boom.
According to the Preqin data, although they take two-thirds
of the deal value, the 45 secondary transactions in Europe this
year account for just 18 percent of the number of deals, meaning
many of the biggest transactions were between rival firms.
(Editing by Mark Potter)