Corporate Financing Analysis - PE Funds To Begin 'Passing The Parcel' With Increasing Frequency - 28 AUG 2017

Private equity funds are struggling to compete with private acquirers in the busy M&A arena. As a result, they are relying on alternative avenues for making deals. Indeed, against the backdrop of a struggling market for private equity M&A dealmaking and sell-downs in 2017 to-date, so-called secondary buyouts - whereby one PE fund sells a portfolio asset to another - offer an alternative route for both, making a successful exit from investments and putting investors' capital to work. But, as BMI highlights, even these 'pass the parcel' transactions have so far failed to gain much traction in the y-t-d period. Going forward through to the end of the year and into 2018, however, we expect secondary buyout activity to increase - especially given that there is plenty of work to be done by fund managers at both ends of the PE cycle.

Indeed, on the spending side, fund managers are becoming increasingly eager to invest the mounting piles of cash which they are sitting on: Bain Capital data show that, by the end of H117, PE firms globally were sitting on USD1.47trn - money which they are eager to deploy. While at the exit end, the typical three-to-five-year investment cycle for PE investment dictates that there are always portfolio units ripe for selling on. Furthermore, with such large sums of dry powder available to fund managers, and with secondary buyouts offering an alternative at a time when valuations of other assets on the market are at such a high, such transactions offer something of a win-win for EP funds looking at both ends of the investment spectrum - especially in the short-term future. Within this, we point to an emerging trend in which a growing number of PE funds from the middle or lower end of the market are selling on assets to those with greater funds, allowing them to go on and unlock further value from the assets as they continue to grow.

2017 No Record Year

Passing The Parcel
Global Announced Secondary Buyout Activity By Deal Value, USDmn
Source: Zephyr, a Bureau van Dijk product

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