Friday Letter: Rollover

The private equity industry has recently been coming under fire for selling assets to the public market at prices that sit far distant from the price these groups paid to take them private.  

John Hess of investment advisory group Altius last week reported the concerns of one long-only public equity asset manager frustrated by what he saw as the buyout industry’s high-handed treatment. His source even threatened a buyers’ strike, unless buyout firms become more considerate and learn to leave a little more “meat on the bone” of the companies they float.

Two news stories this week though might suggest a possible means to silence these critics – as well as a way for GP groups to develop a more constructive dialogue with public market investors.

Eurazeo’s sale of its French, truck hire business Fraikin to CVC Capital Partners, a rival buyout firm, attracted headlines in some quarters for abandoning its initial public offering for the company. CVC managed to see off a listing presumably because it could offer certainty of pricing and speed of execution. But perhaps another attractive element in the deal it could offer Eurazeo, and one that was less well reported, was a €60 million slot in the equity.

In a deal that has returned more than three times Eurazeo’s original investment this was a considerable vote of faith in Fraikin’s prospects and in the buyout model itself. It suggests that even at the price paid by CVC there is plenty of mileage left in the trucks’ tanks.

Similarly, the PEO exclusive on Astorg Partners’ latest fundraising unearthed another rollover investment, when Astorg sold Sebia, a medical diagnostics business from its second fund, to buyout group Montagu Private Equity. Astorg sold to crystallise a staggering return of 12 times its original investment. But it also sold because the lifecycle of a closed-end fund dictated an exit.

It still believed though that Sebia has some way to go in Japan and other new markets, thus an opportunity to re-invest as a minority partner with Montagu was a condition of the deal.

Would public market investors be so sceptical of private equity vendors if they were fellow passengers beyond the public offering (and a brief lock-up period)? Clearly most private equity funds are constrained by the terms of their agreement with the limited partners from making long-term quoted equity investments.

But there are signs of movement. Old UK private equity hand 3i is looking to apply private equity techniques to minority investments in quoted companies. It has not said it will invest in portfolio companies 3i itself has taken public, but if there were value still to be had, then why not rollover a minority investment? And both KKR and Apollo’s Euronext vehicles can make public investments.

Perhaps some buyout managers might want to take a leaf out of Abingworth Management, a life sciences venture firm. Its funds have a side pocket for public investments, essential for venture deals where a float is just another funding event and rarely a full exit.

Imagine the comfort for quoted market investors, if they knew the selling buyout firm was rolling over a portion of its investment for a stub of equity in the public company. But while that remains the ideal rather than the reality, buyout firms might nonetheless do well to publicise their private rollovers in pursuit of a second payday.