The Big Private Equity Sale to … Private Equity

Private equity firms promise investors they can buy a company, turn it around, and make rich returns on a sale. Since the financial crisis, though, many are finding it harder to cash out, so they’re selling portfolio companies to each other. Through private equity funds, institutional investors can end up as sellers and buyers in the same deal—meaning they have to wait longer for big payouts.

In the first nine months of 2012, private equity firms exited 54 U.S. investments through public share sales and sold 115 companies to other buyout firms, according to data compiled by Bloomberg and London-based research firm Preqin. The sales to other firms generated $33 billion, accounting for one-third of private equity’s total cash-outs, up from 13 percent in the year-earlier period and the biggest share since at least 2006. Initial public offerings and other sales on public markets account for 9 percent of cash generated by U.S. private equity sales, the lowest percentage since 2008. “Secondary buyouts are not necessarily troubling, but limited partners may wonder what deal flow a buyout firm has if it is only able to find investments in another private equity firm’s portfolio,” says Mike Kelly, a managing director at Hamilton Lane, which advises institutional investors.