Private Equity Ping Pong

Photo: CM.Yong

Investors in private equity funds are at best ambivalent about the practice of firms selling their portfolio companies to other PE managers– a "secondary" buyout. 

The debate around secondaries is especially fierce in smaller markets like Australia because our LPs are exposed to a larger proportion of the active private equity funds than their American or European counterparts.  If you're an investor in CHAMP's fund then you're probably also in Ironbridge, Quadrant and PEP.

 LPs typically raise two concerns about secondary buyouts:

1. I'm an investor in both the selling and the buying fund.  One team claims that they've sold out for an outrageously high price, but the other manager says he's stolen the company.  Both can't be right, so is there any reason why I should be happy?
2. Even if I'm not a seller and a buyer, is this even a good investment?  If a private equity firm is selling haven't they already extracted the easy value from this asset?

As the Australian market has matured secondary activity has steadily increased.  Examples that jump to mind are GenysisCare, Loscam, Taverner, APP, Bluestone, ATF, Study Group, and WorldMark. 

Despite the discomfort with secondaries among LPs and the poor performance of some recent transactions, I'm calling a secondary buyout boom over the coming months.  The IPO window is firmly shut, there are 150+ companies sitting in Australian private equity hands . . . and the clock is ticking. 

Comments

[FB]

That's an interesting point about the pool of PE managers being relatively small in Australia (even smaller in NZ!) and therefore the limited partners having fewer to choose from.

I wonder if it means that a "star" GP is in an even stronger position in Australia than they would be in the US/Europe?

[Melbourne LP]

Agree with you on secondaries boom. There are a bunch of private equity managers planning new funds over next 12 months and they will need to show good exits.