12/24/21, 4:17 PM Private equity groups spend $42bn buying companies from themselves | Financial Times

Private equity
Private equity groups spend $42bn buying companies from themselves
Value of ‘continuation fund’ deals rises 180% since 2019 as competition for new targets threatens to curb
returns

Lonely Planet owner Red Ventures was among several companies sold by General Atlantic to its own $3bn continuation fund in July
©  Chris Howes/Wild Places Photography/Alamy 

Kaye Wiggins in London 5 HOURS AGO

Private equity groups this year struck $42bn worth of deals in which they sold
portfolio companies to their own funds, a sharp increase over 2020 in a once-niche
type of transaction that can generate handsome payouts to executives.

The deals, known as “continuation fund” sales, involve a buyout group selling a
company it has owned for several years to a new fund it has more recently raised. That
allows it to return cash to earlier investors within the agreed timeframe, while keeping
hold of a company that either has potential to grow or is proving difficult to sell.

Many buyout groups turned to such deals for the first time in the early days of the
coronavirus pandemic, when a freeze in dealmaking and stock market listings left
them with few other exit routes, and have since ramped up their use.

Having spent the past few years raising their biggest-ever pools of cash for deals,
private equity firms are under pressure to invest. Buying from their own funds offers
an alternative opportunity as competition for external targets becomes increasingly
fierce.

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12/24/21, 4:17 PM Private equity groups spend $42bn buying companies from themselves | Financial Times

“The pandemic really spurred private equity firms to evaluate continuation funds”,
said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

That prompted several to ask, “why should I have another [rival] private equity fund
buy one of my best-performing companies from me and make the profits, when I
could do that myself?” she said. “That’s really the ‘aha’ moment.”

This year’s $42bn deal total, calculated by Raymond James’ Cebile Capital unit, is a
180 per cent increase on the 2019 level, and 55 per cent above 2020. The figure
represents the value of the stakes sold, plus any additional capital raised to inject into
the companies.

When selling a company to their own newer fund, private equity dealmakers still
stand to receive payouts of carried interest — a 20 per cent share of profits. They can
then receive a second chunk of carried interest cash later, when the newer fund
eventually sells the company.

Selling companies to their own funds also helps juice private equity firms’ fee income,
because they can continue taking fees from the investors in the new fund that buys it,
and in some cases from the portfolio company itself.

Critics have warned that conflicts of interest are inherent in the model and that it can
be difficult to make sure a fair process takes place to agree a price.

US buyout group Clayton, Dubilier & Rice struck one of the year’s largest continuation
fund deals this month when it sold part of its stake in Belron, a car windscreen repair
company, to its own newer $4bn fund in a deal that valued the business at €21bn.

CD&R had already taken a bumper dividend from Belron this spring, funded by
loading the company with additional debt, in one of the biggest dividend deals of its
kind on record.

General Atlantic sold four of its existing portfolio companies — insurance group
Howden, Mexican pharmaceutical group Sanfer, media company Red Ventures and
price index provider Argus Media — to its own $3bn continuation fund in July.

Continuation funds typically have a five-year lifespan and are backed by a group of
external investors known as secondaries businesses, which raise money from pension
and sovereign wealth funds to invest in the transactions.

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12/24/21, 4:17 PM Private equity groups spend $42bn buying companies from themselves | Financial Times

Sinha Haldea said she had this year seen the emergence of “continuation funds of
continuation funds” for the first time, when companies that were sold into one such
fund a few years ago are now being sold into a second one. She predicts the total value
of continuation fund deals will top $400bn in 10 years’ time.

“It’s potentially cannibalistic to M&A markets,” she said. “That’s a lot of [external]
deals that will not be happening.”

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