With the pandemic wrecking the growth plans of some private equity-owned companies, lenders are helping buyout shops hold on to such assets until they develop further.
Fund-to-fund transfers — which allow a private equity firm to sell an asset from one of its fund to another — are set to increase in 2022, bankers say. Strong investor demand for the debt package behind BC Partners’ transfer of CeramTec suggests more buyout firms may follow this model.
The deal will let one arm of the buyout shop sell the commercial ceramics maker to satisfy the return requirements for one customer base, while allowing the other to sponsor an asset BC Partners believes has longer term potential. This kind of move isn’t entirely new, but it’s far from widespread.
Bankers are entering into talks with a number of private equity firms about such transactions in a bid to deal with the adverse impacts of Covid-19. The moves are popular with institutional investors, as it’s quicker and easier to reinvest in an asset they already know and believe has bright prospects.
“The expectation is that the leveraged market will see more financings supporting fund-to-fund transfers in 2022 as private equity hold onto assets for longer if they see the potential for growth in them,” said Jeremy Selway, head of European leveraged finance capital markets at Deutsche Bank AG.
Many PE firms have struggled to see desired returns on some portfolio companies, especially those in sectors adversely affected by Covid, when two years of poor trading has eaten into investment strategies typically lasting 3-5 years.
Shareholders to Bridgepoint-owned global sports rights management business Dorna are taking a 415 million euro ($464 million) dividend, as part of a wider 975 million euro loan financing. Bridgepoint rebought Dorna in 2019 through a different fund to the initial 2006 buyout.
In some cases where the growth story is slightly more protracted, buyout firms are looking to transfer assets into continuation funds, which have a longer investment maturities and lower expected rate of returns. The lack of supply in the market and competition for assets is also fueling the practice.
“We’re seeing private equity firms holding onto portfolio assets for longer due to a range of factors including Covid and the highly competitive M&A marketplace,” said Jeremy Duffy, a London-based finance partner at law firm White & Case. “From an opportunity cost and ROI perspective they may be better off rolling an asset into the next fund and investing to grow Ebitda, which perhaps has lagged due to Covid.”