Private equity investors are watching their capital flip from the distributions side of their ledgers to the capital call side for the same portfolio companies, as close to a third of exits are sales to other private equity firms.
The percentage of private-equity-to-private-equity sales has been growing steadily, reaching 31% as of Aug. 2, from 25% in 2010, show data from London-based alternative investment research firm Preqin. These exits are second only to sales to strategic buyers and far outstrip initial public offerings.
This affects investors who have capital committed to managers on both sides of the deal, industry executives say. These limited partners have transaction costs by both the buyer and the seller; they are exposed to the portfolio companies longer than either of the general partners; and, after the sale, they are invested in the company at a higher cost basis than they were with the original general partner.
Investors are keeping their eyes on the trend.
Officials at the $14.1 billion New Mexico Public Employees Retirement Association, Santa Fe, question general partners on whether selling to a larger private equity firm or another private equity firm investing in the same industry is part of their exit strategy, before committing to their funds, said Jonathan Grabel, chief investment officer.
Consultant Michael Moy said, “the concern (with private-equity-to-private-equity deals) always was that if I invest in the GP and he turns around and sells to another GP who I am also invested with, I still own the company but at a higher cost basis. The second private equity firm bought the portfolio company for more money than the first GP.”
Mr. Moy is a managing director and member of the board of directors with alternative investment consulting firm Pension Consulting Alliance LLC, who is based in Mission Viejo, Calif.