‘Pass-the-parcel’ comes back into fashion

A number of recent and current deals suggest that the secondary buyout – a mainstay of the credit boom era – may be making a comeback.

As deal activity shows signs of an uptick, a number of firms are viewing secondary buyouts – where portfolio companies are sold from one financial sponsor to another – as a fruitful source of deals.

BC Partners, in its second ever US deal, today agreed to acquire education group ATI Enterprises for an enterprise value of around $500 million from a consortium of private equity firms including The Riverside Company and Primus Capital. The Riverside consortium had acquired the Texas-based business, which provides professional training courses, in April 2005.

In a market where quality assets are still in short supply, secondary buyouts can represent attractive opportunities.

David Walker

Yesterday, The Carlyle Group agreed to acquire OpenLink Financial, a New York-based software developer for the commodity, energy and financial services industries, from TA Associates. The investment will be made from the $13.7 billion Carlyle Partners V.

Hellman & Friedman – also yesterday – revealed it had agreed to acquire Virginia-based Datatel, a provider of software for higher education establishments, alongside another private equity co-investor JMI Equity. The two firms are buying the company from a consortium of private equity firms comprising Thoma Bravo, Trident Capital, HarbourVest Partners and JP Morgan Asset Management.

Permira, meanwhile, is in exclusive talks with Montagu Private Equity to buy Servitec, a manufacturer of survival equipment, a source close to the process has confirmed. Montagu is understood to have placed a £300 million (€334 million; $502 million) price tag on the business.

Earlier this summer Montagu was on the sell-side of another secondary buyout. The firm generated two times its invested capital when it sold Kalle, a German-based manufacturer of sausage casing material, to fellow mid-market private equity firm Silverfleet Capital for €212.5 million in August.

“In a market where quality assets are still in short supply, secondary buyouts can represent attractive opportunities for private equity houses,” David Walker, a private equity partner at law firm Clifford Chance, told PEO. “From a diligence and acquisition perspective they can represent relatively clean targets and from a debt perspective they may be easier to finance if existing lenders agree to roll-over their commitments in some form,” he added.

However, another London-based lawyer said that he had yet to see a meaningful increase in secondary buyout activity and that the market was unlikely to return to boom-time behaviour.

“Most of the activity I am seeing is still deleveraging or just battening down the hatches … or at least trying to stabilise companies so they can get through,” he said.

At the beginning of 2009, Guy Hands, the outspoken head of buyout firm Terra Firma, criticised the private equity industry at large for the increasing number of “pass-the-parcel transactions between general partners, where limited partners essentially retained the same asset while paying fees and carry each time it changed hands”.