LONDON Is private equity getting lazy? Some recent European deals may suggest buyout firms are too ready to spend money buying tried and tested companies from rivals, rather than searching out rough diamonds.
Frozen out of deals for two years by a lack of credit and a stormy economic outlook, buyout firms are now back fighting over assets, keen to spend hundreds of billions of dollars before time runs out and they have to give money back to investors.
This time round their deal of choice seems to be the secondary, or indeed tertiary buyout -- buying businesses, usually at auction, that have already been through private equity hands once or twice.
These so-called "pass the parcel" deals may be a growing and permanent part of the private equity repertoire.
Across Europe, their number has increased by 58 percent in 2010, according to data from Thomson Reuters, compared with a 23 percent rise for all private equity buyouts.
Neil MacDougall, managing partner at buyout firm Silverfleet Capital, estimates that deals between private equity firm account for about 60 percent of buyout activity in France, and Germany and Britain are moving to the same level.
But critics say they are too easy an option for firms which do not want to take the risk a new deal will fall flat.
"It makes you wonder if they are seeing that the current owner has not done all they could, or if (the buyer) is a little more anxious to put money to work than they should be," said an investor who declined to be named.
Investors in private equity will want to kick the tires and get under the hood of such deals.
"I want to hear the rationale of the deal: why they are doing it, why they are excited about it, what they think they are going to do with the business and even more importantly how they think they are going to exit it," said Helen Steers, head of European investment at private equity fund of funds Pantheon.
Many can see the sense in a larger buyout fund with global reach buying from a smaller regional firm -- think Charterhouse buying skin care and medical hygiene firm Deb Group from Barclays Private Equity, said another investor. But a closer rival buying a firm that should already be running efficiently will go under the microscope.
Lion Capital's purchase of BC Partners' BCPRT.UL frozen foods retailer Picard was a case in point, that investor said.
For its part, Lion argues its specialism in consumer brands such as Findus and its expertise in the food and retailing businesses will help it build the business.
At its best, private equity can turn unloved and underperforming family businesses or corporate subsidiaries into market leaders, reaping the rewards along the way.
"The largest opportunities are the diamonds in the rough ... if you can improve something a lot, that is where the greater returns are going to come from," said the first investor.
But after a barren spell, buyout firms flocked to the sale of companies such as Pets at Home, Sebia and Ambea, confident the growing businesses were a sound bet and financing would be available.
Bankers see further hard-fought auctions on the way -- Carlyle's CYL.UL child car-seat maker Britax and 3i's (III.L) Mayborn, which makes Tommy Tippee baby bottles.
But having flogged the family silver, buyout houses will move on to slightly more tarnished goods.
"There are definitely businesses coming to market that have had their issues during the recession," said Florus Plantenga, director at advisory firm Houlihan Lokey.
Investors and advisers alike are keen to see what the demand will be, but some expect it to remain strong and multiples high.
Some private equity firms say secondary buyouts are unfairly maligned and will remain a significant part of their activity as new owners bolt on new businesses and open new markets.
"In pass-the-parcel with private equity, the parcel is usually getting bigger and better," said Silverfleet's MacDougall. His firm bought sausage casings maker Kalle from Montagu last year.
But some investors still need convincing.
"This is an easier way of filling a portfolio, there is no doubt, but is it the best way?" one investor said.
(Editing by David Holmes)