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Pass-the-parcel private equity deals spread, says Eversheds

The proportion of activity coming from private equity groups fishing in each other’s portfolios for so-called “pass-the-parcel” deals has reached a record level, accounting for more than half of the almost EUR20bn of European buy-outs in the first six months of the year.

Mark Spinner, private equity partner and head of the corporate team at international law firm Eversheds, says direct investment opportunities continue to be scarce and in many cases expensive.

In addition, the increase in secondary activity has been fuelled by the fact that there are still a large number of underinvested funds raised in the boom years (2005 to early 2008) which are coming to the end of their investment cycle.

Recent research suggests there is some USD400bn of committed capital in this category.

Other investors coming under pressure to sell assets so that they can demonstrate profits and return cash to investors as a precursor to raising their next fund.

“Many critics of the private equity industry complain that the secondary market is simply a way of passing assets around the industry to trigger additional fees and carry payments to the ‘fat cat’ managers and to quench the thirst of the advisory community for fees,” says Spinner. “However with a number of assets now having achieved good returns for investors notwithstanding that they have been through secondary, tertiary or even quaternary buyouts it seems to appear that for the right opportunities healthy returns can still be made.

“Not every asset will be suitable as a secondary target but it would be wrong to characterise all secondaries in the same way as being bad for investors.”

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