Private equity groups are spending $ 42 billion buying companies of themselves

Private equity groups have deals worth $ 42 billion this year.

In transactions known as “continuation fund” sales, a buyout group sells a company it has owned for several years to a new fund it recently launched. This allows the company to return cash to past investors within the agreed timeframe while holding a company that either has growth potential or is proving difficult to sell.

Many buyout groups first turned to such deals in the early days of the pandemic when a deal freeze and listing left them few other exit routes, and have since ramped up their use.

Private equity groups are under pressure to invest after building their largest transaction cash pools to date in recent years. Buying from your own resources offers an alternative option, as the competition for external goals is getting tougher.

“The pandemic has really spurred private equity firms to value continuing funds,” said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

That prompted some to ask, “Why should I have another one? [rival] Private equity funds will buy one of my top performing companies and make the profits if I could do it myself? ”She said. “This is really the aha moment.”

This year’s $ 42 billion transaction, calculated by Raymond James’ Cebile Capital, is an increase of 180 percent over 2019 and 55 percent over 2020. The number corresponds to the value of the shares sold plus the additional capital invested in in bring in the companies.

When a company is sold to their own newer fund, private equity dealmakers still get carried interest – a 20 percent share of profits. You can then receive a second portion of the carried interest cash later when the newer fund eventually sells the company.

Selling companies to their own funds also helps increase fee income for the private equity groups as they can continue to collect fees from the investors in the new fund that is buying them and, in some cases, from the portfolio company itself.

Critics warn that conflicts of interest are inherent in the model and that it can be difficult to ensure that a fair process to agree a price occurs.

U.S. buyout group Clayton, Dubilier & Rice closed one of the biggest continuation fund deals of the year this month when they bought part of their stake in Belron, an auto window repair company, in their own newer € 4 billion.

CD&R had already received a record dividend from Belron earlier this spring, backed by the burden of additional debt on the company, in one of the largest dividend transactions of its kind on record.

General Atlantic sold four of its existing portfolio companies – Howden insurance company, Mexican pharmaceutical company Sanfer, media company Red Ventures and price index provider Argus Media – to its own $ 3 billion going concern in July.

Continuation funds typically have a term of five years and are backed by a group of external investors called secondaries companies, who borrow money from pension and sovereign wealth funds to invest in the transactions.

Sinha Haldea said she saw the emergence of “continuation funds” for the first time this year, while companies that were sold to one such fund a few years ago are now being sold to a second. She predicts the total value of continuity fund deals will exceed $ 400 billion in 10 years.

“This is potentially cannibalistic for M&A markets,” she said. “That is a lot [external] Deals that won’t happen. “

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