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Private equity groups closed deals this year worth $ 42 billion in which they sold holding companies to their own funds, a big increase from 2020 in a once-specialized type of deal that can generate nice payments to executives.
The transactions, known as “continuation fund” sales, involve a buyout group that sells a business that it has owned for several years to a new fund that it raised more recently. This allows him to return money to previous investors within the agreed timeframe, while still keeping control of a business that has growth potential or is proving difficult to sell.
Many buyout groups turned to such deals for the first time at the start of the coronavirus pandemic, when a freeze on transactions and stock quotes left them little other way out, and have since stepped up. their usage.
After spending the last few years raising their largest pools of liquidity for transactions, private equity firms are under pressure to invest. Equity buying offers an alternative opportunity as the competition for external targets becomes increasingly fierce.
“The pandemic has really prompted private equity firms to value continuation funds,†said Sunaina Sinha Haldea, global head of private equity advice at Raymond James.
This prompted many to ask, “Why should I have another [rival] private equity fund buy me one of my best performing companies and make a profit, when I could do it myself? ” she said. “It really is the ‘aha’ moment.”
This year’s total transaction amount of $ 42 billion, calculated by Raymond James’ Cebile Capital unit, represents an increase of 180% from the 2019 level and 55% above 2020. The figure represents the value of stakes sold, plus any additional capital raised to inject into businesses.
When selling a business to their own newer fund, private equity traders continue to receive deferred interest payments – a 20 percent share of profits. They can then receive a second installment of deferred interest later, when the new fund finally sells the business.
Selling companies to their own funds also helps to earn commission income from private equity firms, as they may continue to earn commissions from investors in the new fund buying it, and in some cases from the holding company. herself.
Critics have warned that conflicts of interest are inherent in the model and it can be difficult to ensure that a fair process takes place to agree on a price.
US buyout group Clayton, Dubilier & Rice struck one of the biggest continuation fund deals of the year this month when it sold part of its stake in Belron, a car repair company. – Car Breeze, to its own more recent fund of $ 4 billion in a deal that valued the company at $ 21 billion.
CD&R had already received an exceptional dividend from Belron this spring, financed by charging the company with additional debt, in one of the largest such dividend transactions on record.
General Atlantic sold four of its existing holding companies – Howden Insurance Group, Mexican pharmaceutical group Sanfer, media company Red Ventures and price index provider Argus Media – to its own continuation fund of 3 billion dollars in July.
Continuation funds typically have a lifespan of five years and are backed by a group of external investors known as secondary companies, who raise funds from pension funds and sovereign wealth funds to invest in transactions. .
Sinha Haldea said she saw the emergence of “continuation funds of continuation funds” for the first time this year, when companies that were sold into one of these funds a few years ago are now sold in a second. She predicts that the total value of continuation fund transactions will exceed $ 400 billion in 10 years.
“It’s potentially cannibalistic for the M&A markets,†she said. “It’s a lot of [external] deals that won’t happen.
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