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.
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.
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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here for the original article from The Wall Street Journal.