The first quarter of this year saw a surge in sponsor-to-sponsor, or secondary buyouts, in which one private equity firm sells a portfolio company to another private equity firm (or group of firms). Data provider Preqin reports 24 such transactions last quarter worth $7 billion in deal value, compared to just $5.1 billion for 43 deals in all of 2009. And this doesn’t even include a rash of transactions announced today (see below).
What’s driving the activity? First, private equity pros are desperate to do deals. Despite everyone’s peacocking that ’08 and ’09 were “the best investing opportunities of our lives,” most buyout pros were all talk. The deal volume speaks for itself-PE pros were largely on the sidelines during the credit crunch. So they’re antsy to get out and spend some money. Not to mention, they’re bumping up against their investment period deadlines. Private equity firms typically get five years to invest their funds; a bounty of 2005- and 2006-vintage funds has its manager’s scrambling to deploy capital in time. Heaven forbid anyone gives the money back. Asking for an extension is tricky in this age of newly-empowered investors.
Beyond that, debt is now available, in many cases, with terms as loose and leverage as available as in the age of the credit crunch. By some standards, you can conceivably buy companies at premiums with leverage that justifies the frothy multiple.
Furthermore, just as many buyout pros are jazzed on selling as are antsy to buy. LPs are still jonesing for liquidity and PE pros know they need to demonstrate a few good exits before entering a still-hostile fundraising market. The high multiples we’ve seen on a handful of recent deals, aided by eager debt providers-Lee Equity paying 10x Ebitda for Charlesbank Capital’s Papa Murphy’s springs to mind-makes selling an easy decision. As one buyout pro said at Buyouts West, “It’s good to be a seller right now.”
The culmination of all of those elements has led to the influx of sponsor-to-sponsor deals.
Look at the action we saw just today:
- Oak Hill Capital Partners bought ViaWest Inc. from Trinity Equity Investors, Goldman Sachs and Quilvest.
- OMERS PE acquired U.S. Infrastructure Corp. from Kohlberg & Co.
- CKE Restaurants, which had agreed to be taken private by THL Partners, today accepted a superior takeover offer from “Western Acquisition Holdings,” a holding company likely to be set up by a private equity firm (my guess is Apollo Management based on earlier reports?)
- Hellman & Friedman and Stone Point Capital acquired Sedgwick Claims from THL Partners, Evercore Partners and Fidelity National Financial.
Other sizable secondary deals from the first quarter included KKR’s acquisition of Pets at home from Bridgepoint Capital for GBP 955 million and Triton’s Eur 850 million buyout of Ambea from GIC and 3i.
Some LPs frown on this move because they believe the upside for the second (or third, or fourth) sponsor is greatly diminished. There are no more “levers” left to pull and the company remains saddled with debt over an extended period. The most recent criticism of the private equity secondary deal was Simmons, which was owned by four different private equity firms over the last 20 years Merrill Lynch Private Equity, Investcorp., Fenway Partners, and THL Partners, each owned the company, in what the New York Times called a Wall Street version of “Flip This House.”
Yet the practice remains popular, justified by the fact that different firms specialize in different things, and as a company grows, it outgrows its current private equity backers and can sell to a new one for its “next stage” of expansion.