Tertiary buyouts: Passing it on

Gail Mwamba
24 June 2010

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As deal making fever returns to the market, tertiary sales appear to be back in vogue for a number of private equity investors looking to put their secondary assets on the block.

A case in point is Cerba European Lab, the French pharmaceutical company, sold by IK Investment Partners to PAI Partners for an estimated €500m. IK had backed the 2006 secondary buyout from Astorg Partners. However, the company's private equity investment history stretches back even further, having previously been backed by Initiative & Finance and Natexis in a previous funding round.

Some tertiary deals have been spurred by investors looking for more experienced buyers that are able to offer speed of execution in addition to an attractive deal price. This was recently the case for Change Capital Partners, which this month sold UK fashion retailer, Republic, in a tertiary deal to TPG Capital for an estimated at £300m. Change Capital backed the company in a 2005 secondary buyout from 3i.

"There was a lot of both private equity and trade interest in the business, and we made the decision to pursue the option of a financial buyer based on both price and timing," says Steve Petrow, managing director at Change Capital Partner in London. "Trade players had a lot of interest, but the time frame that we were working within was quite difficult."

However for Herkules, which recently sold Nordic healthcare equipment manufacturer Handicare to Nordic Capital, financial backers were specifically sought out as Handicare was in need of fresh capital. Herkules, which had bought the company from AAC Capital Partners in 2005, ran out of capital in its first fund and was not able to finance further growth.

"We invited only financial parties, and we had strong interest from Nordic and European funds, and also from US funds with offices in Europe," says Patrik Egeland, Partner at Herkules in Oslo. "We felt the company would benefit from having more capital to grow."

According to Petrow, the industry is expecting to see more tertiary deals moving forward. This may well be the case, with recent reports of private equity buyers reportedly having joined the race to buy Bain Capital's Italian software company, TeamSystem SpA, for an estimated €600m. Bain bought the company in a secondary buyout from Palamon Capital Partners in 2004.

The spurt in tertiary activity may reflect difficult conditions in other exit markets, as the world economy remains weak. However, with some sellers specifically targeting other private equity buyers, believing they can bring something more to the business, it could indicate investors are adopting a longer-term view, hoping their portfolio companies continue to thrive long after investor and company part ways.