- Favors deals outside industry
- ‘Merry-go-round of buying assets’
- Concerns for fees, LPs
Kurt Björklund, a co-managing partner at London-based Permira Advisers Ltd, told an audience at the SuperReturn conference in Berlin, “I don’t think we can build a business in the long term by buying and selling stuff to each other and marking it up as we go along, while charging carry and fees.” Instead, “we should be buying assets from outside the industry, do something meaningful with those businesses, and then sell them outside the industry.”
A number of factors have created a “perfect storm” for secondary buyouts, where one private equity firm buys a company from another firm, industry observers say. The practice has been particularly popular of late because of a lackluster IPO market and the extreme caution of potential strategic buyers when using record levels of balance-sheet cash to make deals. “Often what happens,” said Björklund, “is that it’s the not-growing, second-tier companies … that end up being sold to other private equity buyers.” Buyout firms, he said, often have a “stock of inventory” they need to sell at the end of their holding periods, and other buyout firms offer a convenient exit.
Permira is known to be raising an $8.5 billion buyout fund, and has owned such marquee brands as Hugo Boss and Ancestry.com.
Another speaker at the conference, Robert Lucas, a managing partner at CVC Capital Partners, echoed Björklund’s criticism of secondary sales and criticized some firms for focusing on financial engineering to boost returns. “Private equity is fundamentally about finding really good opportunities where we can create more value than existing owners. … Private equity needs to go back to its roots of real underlying value creation.”
Björklund said Permira generally prefers not to buy companies from other buyout firms because those companies have already been improved to a degree. “The basic levers of what private equity does have already been pulled in a secondary buyout. So, if we normally do 100 percent (of the changes that can be made to a company), we’re now only able to do 40 percent or 60 percent. So, the real alpha in a secondary buyout is almost always lower than in a primary buyout.”
And there are other risks, especially if an investor in one firm’s fund is also an investor in a fund run the firm managing the other side of the deal. Björklund said we want to “avoid making a call in which we tell an LP ‘great news, I’ve made an investment,’ and then have that same LP get a distribution call the next day saying, ‘great news, I’ve just sold an asset.’ The delta between those two numbers is pretty high, because an LP has paid all sorts of fees in between.”
But even a firm like Permira will sell an asset to another private equity firm if the price is right. “We gladly sold IntelSat to another GP [to BC Partners and Silver Lake Partners in 2008] and made a very attractive return on that. If the price is great, then we will do that,” Björklund said. In addition, a secondary purchase might also make sense if the buyout firm selling an asset has a very different footprint or approach. In the past, he said, “we’ve done very well buying companies of U.S.-based small to mid-cap private equity firms that have been driving success in the U.S. We then come in as a European player and have driven significant expansion of the company in Europe and elsewhere across the world.”