domingo, 8 de julio de 2018

domingo, julio 08, 2018

Private Equity: So Hot Even Second-Hand Funds Can Sell at a Premium

Market used to be driven by desperate sellers, now buyers are bidding up the secondary market for private-equity funds

By Paul J. Davies

Jeremy Coller, co-founder and chief investment officer of Coller Capital. In April, Coller Capital and Goldman Sachs Asset Management bought out the existing investors in a fund raised in 2008 by Nordic Capital, a Swedish firm. Photo: Patrick T. Fallon/Bloomberg News


The market for unwanted stakes in private-equity funds used to be where investors who desperately needed cash offloaded holdings at steep discounts.

Now, the market is much more active and mature with bigger deals and surprisingly high prices: some investors have paid more than the funds’ assets are worth. But risks may be growing along with the market. Buyers are using borrowed money to juice returns, which means putting leverage on a portfolio of companies that are already indebted.

Last year saw a record of nearly $50 billion worth of deals globally, according to Credit Suisse ’s private fund group. That was a jump from the $35 billion to $40 billion range in the previous three years, which in turn was much higher than the years before 2014.


Borrowed money was used to help fund almost one-quarter of 2017’s deals, according to Triago, an advisory firm. Where leverage is used, it is typically 40%-60% of the value of the deals, according to Credit Suisse. 

SECOND HAND


Total sales of unwanted stakes in private-equity funds

Source: Credit Suisse Private Fund Group



This year has brought one of the biggest deals ever done. In April, Coller Capital, a specialist secondary investor, and Goldman Sachs Asset Management paid €2.5 billion ($2.9 billion) to buy out the existing investors in a fund raised in 2008 by Nordic Capital, a Swedish firm.


Nordic’s fund was at the end of its expected life so investors were expecting their money back. The deal meant those investors could cash out, but Nordic got another five years to keep improving the underlying companies with new backers.

The deal was unusual because it was so big, but it represents a growing trend of sales led by private-equity firms restructuring their funds rather than by one or two investors wanting to cash out early.

When the market was dominated by distressed sellers and only a few specialist buyers, the sales used to be done at steep discounts to the net asset value of the investments in the fund.

Things have changed: this year the average stake in a private-equity fund is selling at face value and many sell for a premium, according to Palico, an online market for stake sales.


SAVING FACE
Average selling price of stakes in private equity funds as a discount to net-asset value

Source: Credit Suisse Private Fund Group



In Nordic’s case, Coller and GSAM paid 111% of the value of the fund based on Nordic’s previous quarterly report to investors. Some stakes have been sold for much more. Palico tracked 36 deals in the six months to the end of May and of those, 21 were done at face value or more. The highest price was the 115% of face value paid for an EnCap Energy Capital fund. Last year, one stake went for nearly 135% of face value, according to MJ Hudson, a law firm.

High values are paid for popular fund managers, or where investors believe portfolio companies will get much more valuable. But use of leverage is also lifting prices, especially on older funds.

Borrowing is also supporting new investments into private equity: Many investors selling stakes are raising cash for commitments to new private-equity funds. Some investors are doing this without selling their stakes but simply by borrowing against them using more expensive debt from specialist lenders like London-based 17 Capital. 

For now, all this activity is relatively small compared with the $1 trillion of capital that buyout firms are trying to invest globally. But it is yet another sign of the heat building in private asset markets—and the risks that it could end in disappointing returns.

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