When running fixed life funds (typically 10 years), the pressure to exit grows during the life of the fund. This can lead to the sort of energetic transformation of businesses that some PE investors love if it delivers superior returns, and some commentators not so much, if it translates into intensive cost management.
I often suspect that some of the anti-PE reporting in the press is because they would prefer to have companies listed on exchanges so they have more insight, and indeed stories. More difficult to do that when the equity holders are, well, private.
The classic theory in public markets is that the price of a share is the aggregate sum of future cash flows adjusted for time value of money and risk of the business generating those cash flows. So PE managers placing an existing asset into a new fund, at an appropriate valuation, should serve the interests of potentially two sets of people – investors in the original fund and investors in the new fund – who are not always be the same.
It also means that PE judge that future performance will enhance returns rather than drag down the overall performance of the new fund.
The tone of criticism suggests that the original investment thesis has not materialised and the exit options outlined when the PE firm made the investment are not available – which may be true. But external factors affect us all, and if PE want to stay with an investment there will be good logic at play.
I suspect this is a trend we will see repeated over the coming months and years.
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