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Private equity left playing "pass the parcel" in Europe
May 3, 2013 / 1:45 PM / 5 years ago

Private equity left playing "pass the parcel" in Europe

LONDON, May 3 (Reuters) - 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 Allflex.

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)

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