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:
- 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?
- 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.