Private equity funds are increasingly selling minority stakes in investments to pension and sovereign wealth funds as they strive to deliver returns for investors while holding onto prized assets in a hotly competitive market for deals.
Typically, private equity funds hold an investment for several years and then sell most or all of it to another private equity house, a corporate buyer, or list it on the stock market. Now, a growing number of buyout firms are opting just to sell a small part of an investment, enabling them to book some profit without being left with a lot of capital to redeploy.
In September, U.S. private equity fund Francisco Partners sold around 40-50 percent of BluJay Solutions to Singaporean state investor Temasek and kept the rest, valuing the British supply chain provider at around US$700 million.
Singapore’s sovereign wealth fund GIC in July bought a 9 percent stake in Swedish home alarms company Verisure from U.S. private equity fund Hellman & Friedman, according to information provided to Verisure bondholders.
According to Thomson Reuters data, prior to 2017 neither Hellman & Friedman nor Francisco Partners had sold a minority stake to a sovereign wealth or pension fund in five years.
The growth in minority stake sales shows the challenges facing private equity funds in current market conditions. Low interest rates have led to a sharp rise of capital flows into funds as investors look for yields. That has given private equity firms an abundance of cash to invest, but also ramped up competition, and prices, for the assets they normally target.
Committed but un-deployed private equity capital rose to a record US$1.47 trillion in 2016, according to data firm Preqin.
Meanwhile, according to S&P Capital IQ, acquisition multiples reached record or near-record highs across the United States and Europe, at more than 10 times earnings before interest, tax, depreciation and amortization (EBITDA) in both regions at the start of 2016.
Funds are reluctant to sell an asset which is performing well, so instead sell a minority stake to show they can still deliver returns to their investors.
“If it’s an excellent asset, performing well and has a good trajectory, private equity funds will find a way to hold onto it. There’s quite a lot of interest in these minority sales,” said Nandan Shinkre, managing director at U.S. investment bank Jefferies, adding the initial public offering track, while offering a partial sale, was more demanding than this process.
Singaporean sovereign wealth funds and Canadian pension funds have been some of the biggest buyers of minority stakes from private equity firms.
Canadian pension fund Caisse de dépôt et placement du Québec agreed to buy 46 percent of French medical diagnostics company Sebia in August from European private equity funds Astorg Partners and Montagu Private Equity.
Singapore’s GIC in June also took a minority stake in U.K. private equity fund BC Partners’ financial intelligence company Mergermarket. A year earlier, BC Partners sold a significant minority in electronic animal tag maker Allflex to Canada’s Public Sector Pension Investment Board.
These were BC Partners’ first such transactions, a source familiar with the matter said. In the last five years Montagu and Astorg have not sold a minority stake solely to a sovereign wealth or pension fund except for Sebia.
Hellman & Friedman, Montagu and BC Partners declined to comment. Francisco and Astorg did not respond to requests for comment.
Antoon Schneider, who leads the private equity practice in London at consultant BCG, said the trend also reflected the growing interest among sovereign wealth and pension funds to invest directly in companies.
“It demonstrates the appetite for direct investment in the asset class from the backers of buyout funds, even if at a value higher than what the fund originally paid,” Schneider said. “It also benefits the buyout fund by putting an independent valuation on an asset they don’t really want to sell yet,” he added.
Sovereign wealth funds usually put money into private equity funds, and their direct investments into companies are adding to the upward pressure on valuations.
Bankers said they expected more such deals to get done, adding the trend was not necessarily good for their business as they couldn’t charge high fees for the deals. “They don’t tend to refinance or need much advice,” said one banker.
(Reporting by Dasha Afanasieva; Editing by Mark Potter)
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