It is not news that PE firms have been buying each other’s portfolio companies in recent times, but the degree and frequency is increasing, says TermSheet. At the moment, the most active buyers of private equity’s leveraged buyout deals are other LBO funds. In the second quarter, 51% of all leveraged buyouts were bought with new debt by other PE firms, according to Standard & Poor’s Capital IQ, which was cited in the article.
It is a trend that is not exactly thrilling industry observers. In the TermSheet article, one expert said that private equity funds have probably overgrown in the past and that the increase in secondary buyouts is likely due too much cash for too few really good deals. “Once a private equity firm has bought and sold an investment, most private equity buyers struggle to add value the second time around. Our findings show that follow-up deals create little, if any, differential value.”
The article says that others studies PE veterans argue that firms have different expertise. So even after an initial buyout, a new private equity firm might make changes that the first private equity firm may not have thought of or tried. A consequence of the trend could be that LPs will balk at certain fees, according to another expert, if investors see that more and more of those investments come from PE’s “own backyard”, it will become “harder and harder for managers to justify their fees”.