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Buyout funds use minority stake sales to show off best assets

Buyout funds use minority stake sales to show off best assets
From Reuters - October 5, 2017

LONDON (Reuters) - Private equity funds are increasingly selling minority stakes in investments to pension and sovereign wealth funds as they strive to deliver returns for investors while holding onto prized assets in a hotly competitive market for deals.

Typically, private equity funds hold an investment for several years and then sell most or all of it to another private equity house, a corporate buyer, or list it on the stock market.

Now, a growing number of buyout firms are opting just to sell a small part of an investment, enabling them to book some profit without being left with a lot of capital to redeploy.

In September, private equity fund Francisco Partners sold around 40-50 percent of BluJay Solutions to Singaporean state investor Temasek [TEM.UL] and kept the rest, valuing the British supply chain provider at around $700 million.

Singapores sovereign wealth fund GIC [GIC.UL] in July bought a 9 percent stake in Swedish home alarms firm Verisure from U.S. private equity fund Hellman & Friedman, according to information provided to Verisure bondholders.

According to Thomson Reuters data, prior to 2017 neither Hellman & Friedman nor Francisco Partners had sold a minority stake to a sovereign wealth or pension fund in five years.

The growth in minority stake sales shows the challenges facing private equity funds in current market conditions.

Low interest rates have led to a sharp rise of capital flows into funds as investors look for yields. That has given private equity firms an abundance of cash to invest, but also ramped up competition - and prices - for the assets they normally target.

Committed but un-deployed private equity capital rose to a record $1.47 trillion in 2016, according to data firm Preqin.

Meanwhile, according to S&P Capital IQ, acquisition multiples reached record or near-record highs across the United States and Europe, at more than 10 times earnings before interest, tax, depreciation and amortization in both regions at the start of 2016.

Funds are reluctant to sell an asset which is performing well, so instead sell a minority stake to show they can still deliver returns to their investors.

If its an excellent asset, performing well and has a good trajectory, private equity funds will find a way to hold onto it. Theres quite a lot of interest in these minority sales, said Nandan Shinkre, managing director at U.S. investment bank Jefferies, adding the initial public offering track, while offering a partial sale, was more demanding than this process.

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