Partial exits of assets that allow firms to return cash to investors while holding on to companies with potential upside are set to continue, according to one of BC Partners‘ top dealmakers.
These deals make even more sense when selling minority stakes in companies to existing LPs, Jean-Baptiste Wautier, investment committee chairman, told Private Equity International in an interview at the firm’s London headquarters.
“LPs want to put more capital to work, they want to do more directs and they’re always looking for more co-investments,” Wautier said. “If they’re LPs in the fund, it’s an asset that they know, that they have been following. They have been tracking its performance. For them the due diligence process is quicker. They trust us [the GP] so they’re comfortable with a minority position.”
BC Partners, which is investing its 2016-vintage €7 billion BC European Capital X, has run two of these sales: its 2016 sale of a “significant” minority stake in livestock tech company Allflex (now Antelliq) to Canadian pension PSP Investments, and its 2017 sale of a roughly 30 percent stake in financial media company Mergermarket (now Acuris) to Singapore’s GIC.
In both cases, PSP and GIC were existing investors in BC Partners’ 2011-vintage €6.7 billion BC European Capital IX which held the two assets.
For GPs, de-risking investments in this way can allow them to hold on to strong performers and ride another five to 10 years of growth without affecting the fund’s internal rate of return, Wautier said.
“The clock stops on the IRR, and you can continue to enjoy the growth without hurting your total IRR, or at the minimum much less because you’ve returned the full investment,” he said. “I think you’ll see more of that because it makes sense – for the businesses, for investors, for the LPs who invest directly in companies that they want to have exposure to in the long run.”
“If you go to an LP and you give them direct exposure to something that compounds its equity value at a double digit rate, they’re super happy.”
Wautier said that in both the case of Antelliq and Acuris, the firm considered other options such as selling the asset to one of its existing funds, as well as a so-called “single-asset restructuring” in which an asset is moved into a new continuation vehicle backed by capital from secondaries firms. Both options would have proved an “absolute nightmare”, according to Wautier. Finding a market price at which the GP is happy to be a seller and buyer throws up complications including conflicts of interest, while running a bid process and ultimately not selling the asset can also affect a GP’s reputation in the market as a serious seller, he added.
“On paper it looks like a good idea and we did consider it. But when you start implementing it, it’s not worth the headache,” he said.