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Secondary buyouts in private equity are a growing trend

Date: 20 Oct 2016

Citywealth

Bart Deconinck, group deputy chairman at Zedra, also says private equity firms usually beat corporates in bidding rounds, partly because of the pressure on managers to execute a deal.

What trends do you see in the PE sector?

The increase of secondary buy outs, which means one private equity fund selling to another, is emerging as a key trend, whilst historically such deals were always seen as a last resort. It is the result of too much money chasing the same deals and the inherent nature of the private equity business; most funds have a short life span and thus exits off portfolio companies are a constant feature.

How will Brexit uncertainty affect sales of UK private equity backed businesses?

There is indeed an abundance of cash available for investments. Too many private equity managers are chasing too few investment opportunities and the investors in private equity funds may find it difficult to invest all the capital they have available. The managers are under a lot of pressure to find suitable targets and get the deal executed.

Are corporates willing to spend more money than private equity companies to buy targets?

In theory a trade buyer or corporate should be willing to pay more than a financial one. The trade buyer will have the benefit of synergies from integrating the acquired business or will be able to drive transformation. In practice it is often the private equity firm who prevails in a bidding round, partly because of the pressure on managers to execute a deal. In addition more private equity firms follow a buy-and-build strategy and so benefit from the same synergies as a corporate player.

The introduction of the new EU state aid rules has restricted the activities of venture capital trust managers. How does that affect the market?

The new rules place greater restrictions on the type, size and stage of businesses that are eligible for funding. The consequence is that VCT managers must focus on smaller and newer businesses. They prohibit managers from investing in management buyouts and in companies that are more than seven years old. This is actually a good thing for start-ups and early stage companies.

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