Private equity executives today are finding that selling to their peers is their biggest exit opportunity.
That presents a classic good news/bad news situation for investors, who might hear one of their general partners crowing about a big payday while another might have overpaid.
So-called secondary buyouts — in which a private equity firm buys the portfolio company of another private equity firm — was a hot area in the first quarter, with $7 billion in transactions in 24 deals worldwide, according to London-based alternative investment research firm Preqin. That compares with $5.1 billion in 43 deals for all of 2009.
In the U.S. alone, there were 21 private equity-to-private equity deals in the first quarter and by May 5, seven more had already taken place, according to data prepared for Pensions & Investments by PitchBook Data Inc., a Seattle-based research firm.
“Anyone that has a company that is growing and is a good company ... should give a hard look at selling to another private equity firm,” said Ajit Nedungadi, managing director and head of the London office of private equity firm TA Associates. “They (private equity firms) are hot to trot.”
Private equity firms with large funds are “finding that they need to deploy the capital because they are running out of time” because of the typical fund life span, Mr. Nedungadi explained. And they have a lot to spend — an estimated $1.1 trillion, according to Preqin. Funds have only a set amount of time to buy companies, nurture them and then exit the investments. The economic crisis put on hold many plans to sell portfolio companies or take them public, with transaction volume not expected to increase until the end of this year or the beginning of 2011, industry executives say.
Prices are being driven up, making now a far better time to sell than it is to buy, Mr. Nedungadi said.
What's more, prices for companies are going up, in part because banks are offering debt for only the “great deals,” and “there's a scarcity of great deals,” said Antoine Drean, founder and chief executive of Triago, a global private equity placement agent and secondary adviser headquartered in Paris