Private equity flips rise as KKR to Carlyle see fundraising slog

, Bloomberg

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Henry R. Kravis
Henry R. Kravis

Private-equity firms are finding that their best friends these days are other private-equity firms.

Buyout shops struggling with slumping demand for initial public offerings are instead selling their portfolio companies to rivals at a pace not seen since 2006. The trend reflects rough times for the industry — and risks upsetting their investors.

These private-to-private deals don't bring the payoffs from IPOs or sales to corporate buyers that investors expect when they pledge their money to buyout funds. They are also increasing at a time when private-equity returns are falling, potentially making it harder for firms such as New York-based KKR & Co. to attract more money from pensions and endowments uncomfortable with the strategy.

"It does seem like a confluence of sellers looking for points on the board and buyers looking to put dry powder to work before an investment period expires," said Robert Durden, managing director of private assets at Chapel Hill, North Carolina-based Morgan Creek Capital Management LLC, which manages $7.5 billion of assets for institutions and wealthy families.

Some of the biggest institutions, like the California Public Employees' Retirement System, invest in many private- equity funds. That had made them both seller and buyer in effect in some deals, which can drag down their payouts. It happened at least twice this year to Calpers when private-equity funds holding the pension's money sold Party City Holdings Inc. and TransUnion Corp. to other funds in which Calpers had also invested, scrapping proposed IPOs, data compiled by Bloomberg show.

Deal Flow

"Secondary buyouts are not necessarily troubling, but limited partners may wonder what deal flow a buyout firm has if it is only able to find investments in another private-equity firm's portfolio," said Mike Kelly, a managing director at Hamilton Lane Advisors LLC in Philadelphia, which advises institutional investors including pension plans. "Limited partners begin to worry whether certain funds are pursuing these deals just to put money to work."

The private-equity industry is turning to so-called secondary sales as a sluggish economic recovery saps demand for IPOs. Global initial offerings dropped last quarter to the second-lowest level since the financial crisis.

In the first nine months the flips have totaled more than $33 billion -- accounting for one-third of private equity's total exits, according to data compiled by Bloomberg and Preqin Ltd., a London-based research firm. That portion is up from 13 percent in the year-earlier period and the biggest share since at least 2006.

IPO Data

At the same time, IPOs and other public-market sales account for the lowest proportion of cash generated by U.S. private-equity exits since 2008, the data show.

In the first three quarters of this year, firms exited 54 investments through public sales, while flipping 115 to other buyout firms, the data show.

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