The number of deals where private equity groups sold companies to their own funds – to bring about generous payouts for executives – surged this year and were worth $42bn, according to reports.
Known as ‘continuation fund’ sales, the frequency of such deals marked a sharp rise of 55 per cent compared to 2020, according to the Financial Times, which first reported the news. The value of these deals has risen 180 per cent in the last two years, according to calculations by Raymond James’ Capital unit.
A continuation fund sale is when a group sells a company it has already owned for some years, to a new fund which it has only more recently raised. The transaction lets the group hold on to a company – which could grow further, or is simply hard to sell off – while paying back earlier investors and meeting the agreed timeframe for doing so.
At the onset of the pandemic, a number of buyout groups resorted to continuation fund sales when dealmaking and stock market listings froze. The deals have seen become more popular as private equity firms have come under greater pressure to invest while competition intensifies.
“The pandemic really spurred private equity firms to evaluate continuation funds”, Sunaina Sinha Haldea, global head of private capital advisory at Raymond James told the Financial Times.
She said it prompted many to ask themselves why they should let a rival fund acquire and enjoy profits from one of their own best-performing companies instead of doing the same, themselves.
The news comes as global merger and acquisition (M&A) activity records this year surpassed $5tn for the first time ever, smashing records amid a surge of dealmaking in 2021.
Private equity deals also doubled in volume, compared to last year, to a record $985bn (£745bn) as a result of greater access to financing, according to Dealogic data published earlier this week.