Sell-to-yourself is on the rise, but who gets the best deal? | FT Due Diligence

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Private equity is all about buying companies and selling them on, ideally at a profit. But with markets in turmoil and the economy struggling, more and more private equity groups are turning to a new solution. They’re selling companies to themselves. Here’s how it works.

Private equity groups are under time pressure to sell companies because they have to give their investors their money back within about 10 years. Let’s say that decade is coming to an end, and the dealmakers running a private equity fund don’t want to sell a company. Maybe that company is so great that they don’t want to let go. Or maybe its value has fallen, or there aren’t many buyers around.

So if you’re a private equity group, you create some new funds which you control. And then you sell that company or even a handful of companies from your old fund into that new one. You use the proceeds of the sale to repay the investors in the old fund, unless they want to roll over and become investors in the new one.

Clayton Dubilier & Rice sold Belron, a windscreen repair company, to itself in this way. General Atlantic did so with a group of companies, including Red Ventures the media company behind the Lonely Planet travel guides.

But where does the money come from? Often, the new fund gets its money from a group of investors known as secondary funds, which ultimately get their cash from the same kinds of pension funds and sovereign wealth funds as the private equity groups themselves. Sometimes, they’ll bring in other private equity groups or sovereign wealth funds too.

In fact, a lot of private equity firms themselves run these secondary businesses, including big names like Blackstone, Carlyle, and CVC. Which means private equity firms are providing the financing that enables their rival private equity firms to sell their own companies to themselves.

Supporters say these deals give private equity groups more time and let them hold on to good companies. But critics say it’s a way for billionaire dealmakers to make more and more money in fees.

Some stock market investors have warned that it’s not healthy to let companies keep on being passed on privately at higher and higher valuations. Perhaps the main concern is even simpler. You can never really be sure who’s getting a good deal and who is losing out.