Tuesday, January 21, 2014

The Mice Get Crushed

Private-equity firms have recently been cashing out their investments, not through IPO's or sales to corporate giants, but by flipping acquired businesses to other private-equity firms. Per the Economist:
these “pass-the-parcel” deals have become common. In 2013 they represented nearly half the deals in Europe by value.
The Economist article lists reasons for the rapid growth of secondary market transactions: hundreds of billions of dollars are burning a hole in private-equity pockets, due-diligence documents are much cheaper to update than originate, and a multi-year stock market boom has led to a dearth of undervalued buyout candidates. Added to the soup are the eagerness of fee-hungry investment banks and the belief that rising interest rates means that there's only a short window to take on acquisition debt.

Yes, there are win-win rationalizations for secondary market transactions, such as differing tax attributes of buyer and seller and diversification into or away from certain countries or sectors. Nevertheless, the signs of froth are there, just as there were in real estate and tech bubbles past. The small investor would be wise to stay away from private-equity funds; when the elephants are stressed, the mice get crushed. © 2014 Stephen Yuen

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