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Private equity: Finding love the second time around

A private equity investment is for life, or at least until an IPO or trade sale comes along - right? Not necessarily. With IPOs and trade sales proving tricky to pull off today, selling to another private equity firm is becoming more common.

This type of pass-the-parcel deal often takes place just before a firm goes out fund raising. Investors want to see at least some of their capital back before they commit any more money to a fund. So, there's pressure on general partners to find an alternative means of crystallising profits and generating returns, even in an unreceptive market. Transferring assets to another fund is a quick and easy way to do this.

Last year, for example, BC Partners bought private hospital provider General Healthcare from Cinven for e2.1 billion. Cinven had acquired the UK and French healthcare divisions of Compagnie Generale des Eaux (now Vivendi) in 1997. It merged the UK business with Amicus, another healthcare company, before selling it. A firm that has also used this strategy in the past is Doughty Hanson. It is currently in talks with Charterhouse over the sale of Dunlop Standard Aerospace for a reported £900 million. Doughty Hanson bought Dunlop, which has its headquarters in Canada, from BTR of the UK in 1998.

Selling assets to a fellow private equity firm is unlikely to generate as much profit as an IPO or trade sale, so general partners are wise to avoid resorting to this strategy too often if they want to keep investors happy.

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