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This Is What Happens When Private Equity Firms Run Out Of Things To Buy

What do you do when you're part of an industry that has levered up $100's of billions of dollars in investor capital and paid a handsome premium for pretty much every asset available all while "excess cash sits on the sidelines" because there are just no deals left to do at remotely attractive valuations?  Well, if you're Investindustrial, a European private equity fund founded by Italian dealmaker Andrea Bonomi, then you simply raise a new fund to buy all the investments of your old fund.

And while that may sound like a joke, unfortunately it's very true.  As the Wall Street Journal points out today, Bonomi has recently raised $800mm to buy assets that he initially acquired via a $1.1 billion fund originally raised in 2008. 

All of which raises a number of important questions like how exactly are valuations set for such a deal in the absence of a distinct buyer and seller negotiating a fair, market clearing price?  Presumably Bonomi tested the market for his assets but simply didn't like the valuations he was offered?  If so, how could new Limited Partners ever possibly get comfortable with the valuations paid for assets being purchased from the old fund?  After all, the ole "mark to model" methodology didn't work out so well for the Dallas Police and Fire Pension, among others.  

And then there is the question of fees.  Surely, LPs wouldn't be willing to pay '2 & 20' for the runoff of an existing portfolio?  If so, sign us up.

 

Of course, according to the WSJ, Bonomi's effort to buy his own prior investments has nothing to do with gaming fees but is rather just a creative way to be more competitive with sovereign wealth funds that don't have term limitations on their funds...and if you believe that then Bonomi, a man who typically only sells assets to himself, would very much like to offer you the once in a lifetime opportunity to buy some ocean front property in Oklahoma. 

Buyout firms face increasing competition from patient investors like sovereign-wealth funds. One has found a way to play them at their own game: Investindustrial, a European buyout firm, is creating a new fund to buy €750 million ($800 million) of assets it already owns.

 

Investindustrial, founded by Italian dealmaker Andrea Bonomi, has decided on this novel course of action as it responds to greater competition for assets from institutions such as sovereign-wealth funds, which don’t have restrictions on how long they can own companies. The competition is pressuring buyout firms to devise new ways to own companies.

Moreover, the decision is in no way related to poor returns.  In fact, the primary motivator for recycling their old portfolio, at least according to the head of investor relations at Investindustrial, is that returns have been so amazing that it just makes sense to hold on to take advantage of further price appreciation. 

Historically, buyout specialists took pride in their ability to turn around the fortunes of ailing companies and sell them for a big profit within five years.

 

“There used to be no alternative to selling,” Carl Nauckhoff, head of investor relations at Investindustrial, said in an interview.

 

Investindustrial’s move to hold onto Port Aventura for longer comes as fierce competition is pushing up prices for companies, meaning it increasingly makes more sense to hold on to assets than to sell. Some sovereign-wealth funds and pension funds—traditional investors in buyout funds—are increasingly competing directly for assets. And they can hold them for as long as they want. In response, buyout firms like New York-based Blackstone Group LP are raising longer term funds so they can own companies for more than the traditional 10-year maximum.

Meanwhile, as Lazard notes, it's only a matter of time before other funds attempt to copy Bonomi's "innovative" approach to private equity investing. 

The deal could mark the start of a new trend because the increasing size of the buyout industry means many more funds are coming to the end of their lives than in the past, said Pablo de la Infiesta, a banker at Lazard Ltd. who advised on the transaction.

 

“Investindustrial has set a new direction,” Mr. de la Infiesta said in an interview. “I think everybody who has assets sitting in a fund that is coming to the end of its life will be thinking about it.”

Truly genius plan if we understand it correctly.