Private Equity Firms Tap Partial Sales for `Two Bites'

  • Buyout managers are increasingly selling parts of holdings
  • Blackstone, Apax, BC Partners, EQT utilize strategy this year

Private equity firms are increasingly selling parts of their companies and holding on to the rest, locking in some profit while anticipating further upside.

Among exits this year by private equity firms, 24 percent were partial sales, according to researcher PitchBook Data Inc. That’s up from 19 percent in the same period last year.

More buyout managers are turning to the strategy to take some risk off the table and hold on to well-performing companies as the economy stretches later in its cycle. Selling partial positions allows them to return profit to yield-hungry investors while remaining invested in businesses that they’ve helped improve and believe will continue to deliver results.

“Partial sales can be an excellent way for private equity firms to realize strong returns while retaining significant exposure to further upside as the business continues to grow,” said Nikos Stathopoulos, a managing partner at buyout firm BC Partners.

London-based BC Partners agreed in June to sell a minority stake in subscription financial news and data company Mergermarket Group to Singapore sovereign wealth fund GIC Pte.

The partial sale of Swedish pest control unit Anticimex this month by EQT Partners AB is among the latest examples of firms’ eagerness to lock in returns while still holding on to assets. Minority stake disposals to a firm’s investors or to Canadian pension funds are becoming increasingly preferred over sales to other private equity shops, which will often ask for governing rights, board positions or have a control agenda, said Per Franzen, a partner at EQT.

Buyout firms’ investors, known as limited partners, typically consist of pension funds, sovereign wealth funds, endowments, foundations or family offices.

Optiv, Sebia

“The benefit for investors investing in partial stakes is the yield,” Franzen said, “and a good ranking in the company’s capital structure.”

Even private equity titans are utilizing the technique. Blackstone Group LP, the world’s biggest buyout firm, retained a minority position in its sale of cyber-security company Optiv Security LLC to KKR & Co. earlier this year. The agreement handed New York-based Blackstone a partly realized profit of about 500 percent at the time, people with knowledge of the matter said then.

In January, Apax Partners sold 48 percent stake of digital product development services company GlobalLogic to Canada Pension Plan Investment Board. And in August, Montagu Private Equity and Astorg sold a “significant minority stake” of French medical diagnostic equipment maker Sebia SA to Canadian pension fund Caisse de depot et placement du Quebec.

U.S. private equity firm TA Associates has found that the strategy often results in both a higher multiple on invested capital and an increased annualized return, managing partner Brian Conway said. The Boston-based firm has tapped partial sales at least four times this year, including with database lifecycle management company Idera Inc., enterprise legal and risk management solutions provider Mitratech Holdings Inc., Professional Datasolutions Inc. and Truck Hero Inc.

‘Two Bites’

“We’ve had a bias for doing partial liquidity so that you’re not selling your very best companies,” Conway said. “This way, we can sell 40 to 60 percent and then roll 40 to 60 percent to have two bites of the apple.”

Sharing equity in a business with a new private equity investor can also provide validation of future prospects for the company, said Conway, because the new firm has its own return targets to hit.

A traditional way to reap gains from an investment before selling fully has been dividend recapitalizations, or issuing debt to fund a dividend to equity holders. So-called dividend recaps and partial sales aren’t necessarily mutually exclusive, said Tom Evans, a partner at law firm Latham & Watkins LLP.

“It may be that a partial exit is undertaken in combination with a recapitalization,” Evans said. The approach depends on the underlying business’s financial condition and strategy, terms of the leverage and the horizon to exit, he added.

Evaluating the time to exit is where the largest risk of the partial-sale method lies, BC Partners’ Stathopoulos said. By keeping a stake, a buyout firm is betting that a company’s value will continue increasing, which isn’t guaranteed.

“The main risk when a private equity fund chooses to partially realize an investment, with an expectation of further capital gain in the future from the remaining stake, is that valuation multiples in the sector may go down at the time of a full exit,” Stathopoulos said.

(Corrects spelling of Mitratech in 11th paragraph.)
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