THE ANNUAL REVIEW 2010 - PEI Media

page 14 private equity annual review 2010
s to r i e s o f t h e y e a r
j a n | f e b | m a r | a p r | m a y | j u n e | j u ly | a u g | s e p | o c t | n o v | d e c
s e c o n d a r y b u yo u t s
Parcel passing
Montagu was one of the most active firms on the sell-side of secondary buyouts,
which dominated the 2010 deal landscape
Passing the parcel: secondary deals flourished in 2010
Montagu Private Equity in March sold medical technology business
Sebia to Cinven in a deal understood to be worth roughly €800
million. The transaction ended a long and hotly contested auction
process, which ultimately earned Montagu a return of three times
its invested capital.
It also marked the third major asset sale by Monagu to a private
equity buyer in as many months, having previously sold safety
equipment manufacturer Survitec to Warburg Pincus for £280
million and sausage casing manufacturer Kalle to Silverfleet Capital
for €213 million.
Montagu was not alone in selling assets to fellow GPs: in the first
nine months of 2010 in the UK, for example, secondary buyouts
accounted for nearly half (44 percent) of total buyout activity, with
firms trading £5.5 billion-worth of investments between themselves,
according to the Centre for Management Buy-out Research.
Referred to as “pass-the-parcel” deals because they involve assets
being passed from one financial sponsor to another, secondary
buyouts have drawn criticism from limited partners and other market
participants who argue the deals are often struck at high prices and
provide little scope for further value creation. In some instances LPs
find themselves indirectly owning the same asset, which has been
passed between two of its GPs with all the associated transaction costs.
Guy Hands, chief investment officer of Terra Firma, is one GP
that has repeatedly criticised the practice. “Pass-the-parcel deals
take substantial value away from LPs – I estimate approximately
20 to 30 percent of equity each time,” Hands told delegates at a
conference in November. “And if private equity increasingly goes this
route, then it has only itself to blame when governments, unions,
employees and eventually investors don’t support it.”
The criticisms, however, may be unjustified, according to
research produced in late 2010 by the Technische Universtät
Mücnhen in conjunction with Munich-based fund of funds Golding
Capital Partners. The study found that secondary buyouts have
historically generated only marginally lower returns than primary
buyouts. An analysis of 286 realised transactions from Golding’s deal
database revealed that secondary buyouts had generated a median
IRR of 31.9 percent, compared with 37.9 percent generated by
primary investments.
The difference in returns can largely be put down to the fact
that secondary deals are on average larger in size than primary
buyouts, and returns are inversely correlated to deal size, said
the report. The study also concluded there is “little difference”
in the levers for operational value creation between primary and
secondary transactions. ■
Goldman takes top rank in PEI 300
The investment bank’s in-house group
had the largest direct private equity
investment programme in the world
In Spring PEI revealed that private equity’s “silent
giant”, Goldman Sachs’ Principal Investment Area,
had catapulted to the No. 1 spot on the PEI 300,
PEI’s annual proprietary ranking of private equity
direct-investment programmes.
The Wall Street behemoth raised nearly $55
GS headquarters: towering
above competition
billion for direct private equity investment over
the past five years, up from the $49 billion that
earned Goldman the No. 2 spot on 2009’s list.
The firm’s figures have remained high in part
due to the impressive $13 billion it raised for its
fifth mezzanine fund (a strategy that is counted
in the PEI 300 methodology). And, unlike some
other firms that raised large buyout funds in
2007, Goldman has not downsized its $20.3
billion GS Capital Partners VI, which is silently
active all over the planet. ■