According to market sources, intermediaries in London now use a not very flattering label for managers of private equity funds who are facing pressure to invest their capital promptly. Amongst the hard-nosed world of M&A bankers these anxious acquirers are “desperate housewives”.
They aren't hard to find, apparently. Take a look at a GP sitting on unspent capital and you’ll likely be watching a team that is increasingly conscious of its current fund’s fading potential. So if you're a banker shopping a company, you track down those managers with unspent capital in their aging funds – managers who are struggling to extend the fund’s investment period and, crucially, can’t raise any new money until the tail is gone. They are basically dying to do a deal.
This makes them every sell-side M&A advisor’s dream. They need to buy, so they will do a deal at almost any price.
The result is a deal market heavily skewed towards them, and where businesses get sold at big multiples. Says one London GP (who also insists his own firm's next fundraising is sufficiently remote to make him – categorically – not desperate): “If you're on the list, the bankers will call you every time they have a deal; if you're not on the list, they probably won't bother.”
Which also helps explain the secondary buyout spree of late. Take the UK for example: of the £5 billion of private equity buyouts completed in the first quarter, according to CMBOR, more than 70 percent by value involved assets sold by private equity to private equity. Buyout funds in exit mode invariably sell to the highest bidder, so given this flurry of activity, with financial buyers outbidding strategic ones more often than not, it is hard to resist the conclusion that desperate housewives are indeed at large.
For limited partners, this is bad news. 2010 has been tipped to produce some strongly performing private equity investments. However, fully priced secondaries aren't the obvious or most reliable route to this outcome.
And as for some of the managers sponsoring such deals (no need to name names; you know who you are): the future is likely to be tough. Expensive investments struck mainly to get rid of unspent cash don’t make for great calling cards with investors. Frankly, they smack of desperation, and in the end could well prove counterproductive. Because a track record of desperate deals will make that next fundraising even harder.