Selling to your self: the personal fairness teams that purchase firms they personal


In quiet corners of suburban England lie two personal firms which have skyrocketed to multi-billion-pound valuations in lower than a decade, whereas barely registering within the public consciousness.

Belron and The Access Group are each long-established companies which are removed from the picture of sizzling start-ups with revolutionary merchandise. Located on the outskirts of Egham within the south-east, Belron repairs and replaces automobile windscreens; The Access Group, based mostly simply exterior the Midlands city of Loughborough, sells back-office software program.

Over the previous six months, traders have given each firms valuations that place them amongst Britain’s largest firms — €21bn for Belron and £9.2bn for The Access Group. Belron’s valuation has climbed 600 per cent since 2017 and The Access Group has risen an eye-watering 3,800 per cent since 2015.

Yet neither group has been uncovered to the minimize and thrust of public markets. Instead, their valuations had been set in a brand new and controversial kind of transaction that’s quick changing into the personal fairness business’s hottest pattern within the US, UK and a number of other different markets — offers by which a buyout group in impact sells an organization to itself.

Such offers have partly been a consequence of the tidal wave of money that has flooded personal markets in the course of the lengthy period of low rates of interest. As that period involves an finish and a downturn looms, these offers are set to change into extra enticing than ever for personal fairness teams with firms to promote.

Gary Gensler, chairman of the US Securities and Exchange Commission, which is scrutinising continuation funds as a part of a wider evaluation of disclosure within the personal fairness business © Melissa Lyttle/Bloomberg

Vincent Mortier, Amundi Asset Management’s chief investment officer
Vincent Mortier, Amundi Asset Management’s chief funding officer, stated this month that components of the buyout enterprise ‘look like a pyramid scheme’ due to ‘circular’ offers by which firms are offered between personal homeowners at excessive valuations © Magali Delporte

The offers — a approach for buyout teams to return money to their unique traders inside a pre-agreed 10-year time interval, with out the necessity to record firms or discover exterior consumers — have been rising in recognition for the reason that early days of the Covid-19 pandemic, when a market freeze prompted a seek for new choices.

But promoting firms to themselves dangers placing the business on a collision course with a variety of various teams.

Some of personal fairness’s personal traders complain that the offers can in some instances serve to counterpoint buyout billionaires and multimillionaires on the expense of their pension fund shoppers by enabling them to maintain levying charges. The Securities and Exchange Commission needs to reform the market, requiring extra checks that valuations are truthful.

Equity market traders have gotten more and more vocal about how personal markets worth firms. Vincent Mortier, Amundi Asset Management’s chief funding officer, stated this month that components of the buyout enterprise “look like a pyramid scheme” due to “circular” offers by which firms are offered between personal homeowners at excessive valuations.

Speaking privately, some pension funds are annoyed. “This is wonderful for the [buyout groups]; it’s one of the best things they ever discovered,” says one pension fund’s head of personal fairness, who requested to not be named.

But “it’s one of the worst things” for his or her traders, he provides. “The pie is getting bigger” as personal fairness balloons in dimension, he says, however “more of the pie is going to the [private equity firm] and less is going to [its investors].”

A structural change

In the personal fairness business, promoting an organization to your self can take a number of kinds, and dealmakers battle to resolve what to name the method. It is typically labelled a “continuation fund” and even, within the business’s often-inscrutable jargon, a “GP-led secondary” or “adviser-led secondary”. A standard function is {that a} stake in a number of portfolio firms is offered from one fund to a different, each of that are managed by the identical personal fairness agency.

Deals value $65bn had been carried out this fashion final 12 months, up from $27bn in 2019, in accordance with Raymond James’ Cebile Capital unit.

Industry figures anticipate that quantity to maintain rising. “It’s a structural change, a structural addition to the private equity ecosystem, [and] it’s here to stay,” says Sebastien Burdel, a companion at Ares who focuses on the asset supervisor’s secondaries enterprise.

“In an environment where exits [sales of portfolio companies] are going to slow for a period of time, having that extra tool . . . is going to be increasingly attractive.”

A woman attaches suckers to a car windscreen
Windscreen restore and alternative firm Belron, which operates internationally underneath manufacturers together with Autoglass and Safelite, was valued at €3bn in 2017

Windscreen restore and alternative firm Belron, which operates internationally underneath manufacturers together with Autoglass and Safelite, was valued at €3bn in 2017, when US buyouts group Clayton, Dubilier & Rice agreed to purchase a 40 per cent stake.

Since then, its core earnings had roughly trebled as margins had risen, partially as a result of new know-how had made windscreens extra complicated and dearer, an individual near the corporate stated.

In December final 12 months, CD&R offered a minority of its holding to a trio of recent traders, Hellman & Friedman, BlackRock’s personal fairness enterprise and the Singaporean sovereign wealth fund GIC. The deal valued Belron at €21bn, virtually 20 occasions its earnings, roughly twice the a number of that CD&R had initially paid, the individual stated. CD&R then offered the remainder of its stake to its personal particular function car, which it arrange particularly to personal the Belron stake, on the similar valuation.

The Access Group, whose shoppers embody the Beatles Story vacationer attraction in Liverpool and the Latymer public faculty in London, has been repeatedly offered between funds belonging to its personal fairness homeowners TA Associates and Hg, since TA first purchased a stake in 2015 at a valuation of £231mn.

Deals in 2018, 2020 and June 2022 noticed its valuation soar to £1bn, £3bn and £9bn, respectively. That leaves The Access Group, which has itself been on a dealmaking spree to snap up about 40 firms within the final 5 years, with the next valuation than the FTSE 100 software program supplier Sage Group — a UK rival whose shares have tumbled this 12 months.

Colourful costumes on display at the Beatles Story tourist attraction in Liverpool
The Access Group, whose shoppers embody the Beatles Story vacationer attraction in Liverpool, has been repeatedly offered between funds belonging to its personal fairness homeowners TA Associates and Hg

The firm’s homeowners “don’t feel any pressure to go out and list this business now or in the future,” says an individual near the offers. “There’s plenty of private capital available — they don’t need to go public in order to be able to generate returns for investors.”

Hg says its traders had been at all times given the prospect to dam the deal fully, and {that a} third-party investor would set the worth in any firm it was promoting between its personal funds.

Flush with money

In order to purchase their very own firms, personal fairness corporations typically elevate cash from a little-known group of specialist traders often known as “secondary funds”. CD&R raised among the $4bn it used to buy its personal Belron stake from this market, although The Access Group offers didn’t faucet it.

Secondary funds elevate money from pension and sovereign wealth funds — the identical establishments that spend money on buyout funds. They are flush with money, having raised $78bn in 2020 and $37bn in 2021, a leap from $24bn the earlier 12 months, in accordance with the Raymond James information.

Many of those funds are actually run by items of personal fairness corporations themselves, with Blackstone, Ardian, Carlyle and Ares amongst those who have important so-called secondaries companies. The upshot is that these personal fairness teams are offering the funds that make it potential for different buyout teams to promote their very own firms to themselves.

For these teams, “the idea is, you can create a greatest hits album” by shopping for into automobiles set as much as personal personal fairness’s best-performing firms, says Tony Colarusso, international head of personal capital advisory at Morgan Stanley.

Line chart of Total value of deals ($bn) showing Continuation fund deals are on the rise

French buyout group Ardian has a $19bn secondaries fund and Blackstone was on track to lift about $20bn for its newest such car, chief working officer Jon Gray stated on an earnings name in October.

Others have spent the final two years racing to both arrange their very own secondaries companies, or purchase current ones. Ares struck a deal final March to purchase Landmark Partners, which funds continuation fund offers amongst different specialist transactions, and CVC Capital Partners agreed to purchase Glendower Capital in September. Asset supervisor Franklin Templeton, higher identified for its mutual fund merchandise, purchased the secondaries specialist Lexington Partners for $1.75bn in November.

Brookfield chief government Bruce Flatt stated in 2020 that the personal fairness secondaries market “could be a $25bn to $50bn business for us” and was “a meaningful extension” for the agency, whereas Apollo recruited three senior BlackRock executives in April to guide its push into the market, and TPG has employed specialists from the Canada Pension Plan Investment Board, Pantheon and Landmark because it seeks to do the identical.

Both sides of the deal

As the market grows, nonetheless, a number of issues are being raised about how these offers work in observe.

The most continuously expressed and maybe most evident is the battle of curiosity that happens when the identical buyout group is on each side of a deal.

“When everything is said and done, it will either turn out to be a better deal for the buyer or for the seller,” says a senior government at a significant buyout group that has not offered any firms to itself. “We don’t want to get into that position.”

Unlike within the Belron case, personal fairness corporations typically prepare continuation fund offers with out operating a aggressive sale course of by which firms or rival buyout teams are invited to bid.

In these offers, the pension plans and different traders within the older fund promoting the corporate say they can’t be positive they’re getting the highest-possible value.

Five of the most important continuation funds


December 2021
Private fairness group: CD&R
Portfolio firm: Belron (Vehicle glass restore and alternative)


July 2021
Private fairness group: General Atlantic
Portfolio firms: Argus Media (Market information and enterprise evaluation); Red Ventures (Media, together with CNET and Lonely Planet); Sanfer (Pharmaceuticals); Howden Group Holdings (Insurance)


July 2021
Private fairness group: New Mountain Capital
Portfolio firms: Western Dental (Medical providers); Information Resources (Data analytics and market analysis); Avantor (Medical services and products)


March 2022
Private fairness group: Accel KKR
Portfolio firms: Abrigo; Vitu; Kerridge Commercial Systems; Energy Services Group; IntegriChain; ClickDimensions; TrueCommerce (all specialist software program suppliers)


January 2021
Private fairness group: Audax
Portfolio firms: Innovative Chemicals Products Group; Justrite Safety Group (Manufacturing); 42 North Dental (Medicine); TPC Wire & Cable Corp (Manufacturing)

Note: The Access Group shouldn’t be thought of a continuation fund deal as a result of its personal fairness homeowners offered it between their current funds slightly than creating new automobiles, and didn’t usher in cash from specialist ‘secondary’ funds

Source: Raymond James’ Cebile Capital unit

Data on sale costs would seem to substantiate their worries. Forty-two per cent of continuation fund offers worth the underlying firm at lower than the personal fairness agency had instructed the traders it was value, in accordance with analysis by Raymond James. Half worth the businesses on the similar quantity the personal fairness agency had estimated it to be value and solely 8 per cent are offered at a premium.

“You should get honest price discovery for these [investors],” says Jeffrey Hooke, a lecturer at Johns Hopkins’ Carey Business School. Most pension funds “don’t have the guts or the resources to challenge these prices [but] they’re representing hundreds of thousands of retirees living on fixed incomes”.

Buyout teams reply that they provide traders of their unique fund a alternative: they’ll change into an investor within the continuation fund or stroll away. But the concept of an actual alternative, with an possibility for the deal to be known as off, “is a bit of a pink unicorn that never really exists”, in accordance with a managing director at an funding agency that allocates money to buyout teams. Several pension fund executives stated they got too little time to make the choice.

The SEC is now scrutinising the mannequin, a part of a wider evaluation of disclosure within the personal fairness business. It plans to require buyout teams to fee a equity opinion after they promote firms to themselves, and to reveal any “material business relationships” it has with the corporate offering the opinion.

‘Super carry’ offers

Private fairness corporations and their dealmakers can reap nice monetary rewards from continuation funds— by charging their traders increased charges and taking the next share of the earnings.

“Capturing a larger share of the fee pool” is “economically interesting” for buyout teams and is likely one of the driving forces behind their use, says Bernhard Engelien, co-head of European personal capital advisory on the funding financial institution Greenhill.

The difficult economics behind personal fairness funds can obscure how this works. In easy phrases, normal buyout funds cost their traders, corresponding to pension funds, an annual administration charge of between 1.5 and a pair of per cent of the cash they’ve dedicated to the fund.

But as soon as a fund has completed its so-called “investment period”, when it’s shopping for firms — roughly its first 4 to 6 years — it stops charging charges as a share of the cash dedicated. Instead it prices charges as a proportion of the cash used to purchase the businesses that the fund has not but offered. The impact is that buyout corporations make far much less in administration charges within the later years of a fund’s 10-year life.

Selling firms in an older fund to a continuation fund lets the buyout group revive the flagging charge base. The new car prices charges as a proportion of the quantity it invested in an organization — invariably the next sum than the older fund paid.

Then there may be the carried curiosity: the 20 per cent share of earnings on profitable offers that may present profitable, and tax-advantaged, payouts to buyout executives.

Dealmakers can obtain these so-called “carry” payouts twice, as soon as when an organization is offered to the continuation fund and once more when that car later sells it, although they normally put many of the first payout again into the brand new car.

Carried curiosity is usually solely paid out after a personal fairness fund fingers a pre-agreed return to its traders, typically round 8 per cent. If a fund appears to be like to be more likely to miss that focus on however accommodates a star firm from which dealmakers would in any other case have reaped a big revenue share, shifting the excessive performer into a brand new fund permits dealmakers to obtain the payouts.

Two pie charts comparing for 2018 and 2021 showing More and more continuation funds involve a single company

Better nonetheless for the dealmakers, in some instances they’ll negotiate so-called “super carry” on the continuation fund. Some use a tiered carried curiosity mannequin the place, if the corporate within the new car generates lower than a 20 per cent return for traders, the dealmakers would obtain lower than the usual 20 per cent revenue share. But if it generates extra, they’ll obtain way more.

In a survey of the specialist traders that finance continuation fund offers, sixty-eight per cent stated they’d funded no less than one with a “super carry” provision, in accordance with Raymond James. Those normally permit buyout executives to maintain as much as 25 per cent of the earnings however in some instances stretch as excessive as 30 per cent.

“[As a buyout group] you set the price for your deal, you sell it to yourself, you crystallise a bunch of the carry, and now you’re charging more fees on the same company you already owned,” says the pension fund government. “In the old days you would just keep managing this for a lower fee, without carry.”

Even the Institutional Limited Partners Association, which represents the traders whose cash personal fairness corporations handle and which isn’t identified for punchy public criticism of the buyouts enterprise, has spoken up.

“As LPs [investors] in the original funds . . . the secondary is often structured in such a way that the benefits disproportionately accrue to the adviser [the private equity firm],” it stated in a submission to the Securities and Exchange Commission.

At the center of the offers is a broader challenge that’s changing into extra important as inventory markets tumble. Companies owned by personal fairness teams are going through the identical pressures as their listed friends, as rates of interest rise, provide chains battle and an financial downturn looms.

Critics of the business imagine a few of these offers could possibly be a approach of hiding from this actuality.

“It is a myth that private equity investments are good investments to have in times of stock market turmoil,” says Eileen Appelbaum, co-director of the Center for Economic and Policy Research. Continuation funds masks “an unpleasant truth”, she says, by enabling the personal fairness business to maintain doing offers that shelter their firms from valuations within the public markets.

The query, she provides, is for the way lengthy that may proceed.