Pace of exits slow for PE industry

There’s a lot more hold in the buy-and-hold strategy these days.

U.S.-based buyout firms completed 54 exits and partial exits through M&A and related activity during the third quarter, down from 115 in the third quarter of 2007, but up from 38 in the second quarter, according to Thomson Reuters (publisher of PE Week).

The tally includes the sale of assets, minority stake deals, and, in the case of Celerity Partners’ sale of clinical research services provider Vince & Associates to Gryphon Investors Inc., a recapitalization in which Celerity Partners has retained a stake. The quarter saw only one IPO involving a U.S.-based buyout sponsor. That mirrors what’s happening in the venture industry as only one VC-backed company, Rackspace Hosting, went public in the third quarter, which brings the total number of venture-backed companies to go public to six in 2008.

The sole buyout-backed concern that pursued an IPO was GT Solar International Inc., backed by Oaktree Capital Management. The Merrimack, N.H.-based provider of photovoltaic manufacturing equipment raised $500 million when it went public in July. It sold 30.3 million shares for $16.50 each. The IPO price was within the anticipated price range of $15.50 to $17.50 a share.

The single IPO of the latest period is down from the 13 buyout-backed companies that went public a year earlier and from the two that occurred during the second quarter of 2008.

For the buyouts industry, M&A exit volume also took a nosedive. The handful of transactions with disclosed prices in the latest period added up to only $953.5 million, down from $30.2 billion in the year-ago period, according to Thomson Reuters.

M&A exits in the third quarter also lacked scale, which is evident in the value of the quarter’s biggest deals. In the largest, Fortress Investment Group sold its Eurocastle Investment Ltd. unit’s Fuerstenhof office building to Union Investment Real Estate AG for $202.5 million. The next largest exit involved Francisco Partners’ sale of its Ex Libris Group unit to Leeds Equity Partners in a secondary deal for $200 million.

Evercore Partners Inc. was the most active in the M&A exit market during the latest period. The New York-based firm sold “meaningful minority positions” in five portfolio companies to Accretive Exit Capital Partners for a combined $110 million. Boston-based Accretive Exit Capital is already lining up exit opportunities for Davis Petroleum. In March 2006, a group led by Evercore Partners purchased Davis Petroleum for about $150 million.

Other buyout firms with at least two M&A exits to their credit in the quarter include American Capital Ltd., Blackstreet Capital Management, Carlyle Group, Heritage Partners Inc., Madison Dearborn Partners and Riverside Co.

Riverside registered three exits in the third quarter. The New York-based firm took Universal Air Filter Co. into its portfolio in December 2005 and sold it to Thompson Street Capital Partners in July 2008. The exit generated a 109% gross IRR and a 4.8x gross cash-on-cash return, including an April 2007 recapitalization. Riverside’s exit of Moss Inc., which was purchased in September 2000, generated a 33% gross IRR and a 4.2x gross cash-on-cash return. The third exit came from the sale of IndustrieHansa Consulting & Engineering GmbH to Findos Investor GmbH. Riverside acquired the company in December 2006.

Accretive Exit Capital, involved in Evercore Partners’ five exits, was the most active acquirer in the third quarter. Another firm involved in multiple transactions was Signature Brands, which purchased Gift Products Inc. and Houston Harvest Inc. from Blackstreet Capital. Signature Brands, a joint venture of McCormick & Co. and Hero AG, makes and sells dessert decorating products under the Betty Crocker name and other brands.

Business services was the most popular sector for M&A exits in the quarter, with four transactions. They included CDRSVM Acquisition Co.’s sale of disaster response services provider InStar Services Group Inc. to BlackEagle Partners and Veronis Suhler Stevenson’s divestiture of Telecom Intelligence Group to T3i Group.