What’s behind the ongoing trend among private equity firms across the globe
There is an ongoing trend among private equity firms across the globe which involves the selling of only a minority stake in assets to sovereign wealth funds to continue milking returns from investments they value highly.
The typical strategy employed by these firms historically was to hold an investment for several years before selling most or all of their stakes to a corporate buyer or another private equity player. Others would choose to eventually list the investment on a stock market.
However, times have changed and these buyout firms are choosing to put just a small part of these prized investments up for grabs, allowing them to still reap benefits without being left with huge capital to recycle.
For instance, Reuters reported that private equity fund Francisco Partners sold up to 50% of its stakes in BluJay Solutions to Singapore state investor Temasek. It kept the remaining control on the British supply chain provider with a value of US$700 million.
Meanwhile, US private equity group Hellman & Friedman closed a deal with Singapore sovereign wealth fund GIC involving the latter's subscription of 9% stake in Swedish home alarms firm Verisure.
This is interesting, as according to Reuters’ data, neither of the two firms mentioned had sold minority stakes to a sovereign wealth or a pension fund in the last five years.
The trend could be an indication of the challenges faced by these buyout firms in the current market conditions. For starters, the low-interest rates have resulted in a sharp increase of capital flows into funds as investors seek yield. This, in turn, led into private equity firms amassing huge sums of cash to invest, which therefore ramped up the competition for assets.
Citing data from Preqin, the report noted that undeployed private equity capital reached a record high of US$1.47 trillion last year. Meanwhile, figures from S&P Capital IQ showed that acquisition multiples hit near-record highs across Europe and the United States.
Jefferies managing director Nandan Shinkre said these funders are shying away from selling a performing asset wholly. Instead, they go for selling a minority stake to still get a hold on the potential returns of such assets.
"If it’s an excellent asset, performing well and has a good trajectory, private equity funds will find a way to hold onto it. There’s quite a lot of interest in these minority sales," he told Reuters.
As it turns out, aside from Singaporean wealth funds, Canadian pension funds have been one of the biggest and most active buyers of minority stakes from private equity firms.
For instance, Caisse de dépôt et placement du Québec purchased 46% stake in Sebia, a French medical diagnostics firm, from private equity firms Astorg Partners and Montagu Private Equity.
London-based BCG head Antoon Schneider said this trend also demonstrates the growing appetite amongst sovereign wealth and pension funds to invest directly in companies.
"It also benefits the buyout fund by putting an independent valuation on an asset they don’t really want to sell yet,” he said.
For more of Wealth Professional's latest industry news, click here.
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Private equity firms filling void left by banks
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The typical strategy employed by these firms historically was to hold an investment for several years before selling most or all of their stakes to a corporate buyer or another private equity player. Others would choose to eventually list the investment on a stock market.
However, times have changed and these buyout firms are choosing to put just a small part of these prized investments up for grabs, allowing them to still reap benefits without being left with huge capital to recycle.
For instance, Reuters reported that private equity fund Francisco Partners sold up to 50% of its stakes in BluJay Solutions to Singapore state investor Temasek. It kept the remaining control on the British supply chain provider with a value of US$700 million.
Meanwhile, US private equity group Hellman & Friedman closed a deal with Singapore sovereign wealth fund GIC involving the latter's subscription of 9% stake in Swedish home alarms firm Verisure.
This is interesting, as according to Reuters’ data, neither of the two firms mentioned had sold minority stakes to a sovereign wealth or a pension fund in the last five years.
The trend could be an indication of the challenges faced by these buyout firms in the current market conditions. For starters, the low-interest rates have resulted in a sharp increase of capital flows into funds as investors seek yield. This, in turn, led into private equity firms amassing huge sums of cash to invest, which therefore ramped up the competition for assets.
Citing data from Preqin, the report noted that undeployed private equity capital reached a record high of US$1.47 trillion last year. Meanwhile, figures from S&P Capital IQ showed that acquisition multiples hit near-record highs across Europe and the United States.
Jefferies managing director Nandan Shinkre said these funders are shying away from selling a performing asset wholly. Instead, they go for selling a minority stake to still get a hold on the potential returns of such assets.
"If it’s an excellent asset, performing well and has a good trajectory, private equity funds will find a way to hold onto it. There’s quite a lot of interest in these minority sales," he told Reuters.
As it turns out, aside from Singaporean wealth funds, Canadian pension funds have been one of the biggest and most active buyers of minority stakes from private equity firms.
For instance, Caisse de dépôt et placement du Québec purchased 46% stake in Sebia, a French medical diagnostics firm, from private equity firms Astorg Partners and Montagu Private Equity.
London-based BCG head Antoon Schneider said this trend also demonstrates the growing appetite amongst sovereign wealth and pension funds to invest directly in companies.
"It also benefits the buyout fund by putting an independent valuation on an asset they don’t really want to sell yet,” he said.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Private equity firms filling void left by banks
How to invest in the emerging market debt space
