This content is from: Portfolio

Churning Private Equity Portfolios

Institutional investors with numerous private equity interests are increasingly finding themselves on both sides of a transaction, as one of their funds sells a portfolio company to another one of their funds. Who do you think loses in this situation? Exactly...

Here’s a frustrating story from Businessweek about the ridiculously misaligned interests of LPs and GPs in private equity:

Through private equity funds, institutional investors can end up as sellers and buyers in the same deal... In the first nine months of 2012, private equity firms exited 54 U.S. investments through public share sales and sold 115 companies to other buyout firms...'

And here’s more:

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.

This is happening because the PE firms have windows of opportunity with which to deploy capital and / or harvest gains. So the managers trade companies among themselves in order to meet their own goals and objectives. 

In sum, institutional investors are increasingly finding themselves in situations where one of their private equity fund managers is selling a portfolio company to another one of their private equity fund managers. As such, the LP gets dinged for all the transaction costs and fees, and they wind up holding... the exact same underlying asset / company. 

This, friends, is why so many LPs are trying to figure out more aligned ways of accessing private equity. Question: When... and how... will this industry be shaken up by some upstart funds that offer true alignment of interests? I for one am impatiently awaiting the arrival of a viable evergreen PE fund. Has anybody seen one?

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