Pass the parcel deals get personal

Pass the parcel deals are nothing new in private equity. Indeed, on a perennial basis, rafts of secondary buyouts make the headlines. Firms blithely exchange portfolio companies among themselves, with all but the most naive of investors aware that these deals sometimes have more to do with achieving an exit for a GP on the fundraising trail than with the market readiness of the company itself.

One phenomenon which is less documented is what happens when a partner moves from one firm to another and acquires a company they personally managed on behalf of their previous employer. This is precisely what happened in the case of Italy's La Gardenia buyout in July, which saw Bridgepoint's Lucio Ranaudo acquire the cosmetics business he formerly managed on behalf of L Capital from L Capital and Ergon Capital Partners. In France, meanwhile, Olivier Nemsguern led the acquisition of Findis back in April, having the managed the original investment in the household appliances distributor for vendor Abénex Capital in 2007.

The attraction of such a move is obvious for all involved. Indeed, it could be a novel way of overcoming one of the biggest risks in private equity - knowing less about the company you're buying than the seller. "If you've owned the company, and the management team and the board have been the same for several years, then that asymmetry of information isn't there," points out Volker Hichert of Parcom Deutsche Private Equity (PDPE). During his time at Granville Baird, Hichert managed Westfalia and SSB, both German companies which he went on to acquire after leaving to found PDPE in 2007. A former Granville colleague of his, who now works for a different PE firm, is also considering making an acquisition from this old portfolio. Hichert adds: "Anyone who has worked for some time in the industry has a knowledge of certain sectors or individual companies which is going to give them an edge in the process. In some cases, they will have hired the people who are on the board and know them on a personal basis - that edge then becomes very significant."

It is plausible that PE investors will start looking to their former portfolios as a fertile hunting ground at a time when many are decrying the lack of market opportunities. Luis Seguí, who led Nazca Capital's investment into Spain's Guzmán in 2005, recently bought the gourmet food supplier on behalf of Miura Private Equity, which he established in 2007. "This is certainly one more way of originating deals," he says. "Individuals who do this have a fantastic knowledge of the portfolio companies of the firm they leave, so it's easy for them to approach them and suggest a potential transaction." Hichert, however, is more cautious about recommending what he did as a long-term tactic. "It would be a very short-lived strategy if anyone tried to rely on it," he says.

Remaining in the lives of portfolio companies for an extended period has the potential to do more than just prove a useful deal origination method. Hichert and Segui have already been involved with Westfalia and Guzmán respectively for between six and 10 years - could executives like them help change private equity's reputation of focusing on short-term results? Segui hopes they will: "Doing an SBO in this way makes a lot of sense from a business point of view; it enables you to work with a management team for 12 years or more. They just change the equity sponsor, collect the proceeds and continue with the same project." It's a win-win situation for the individual investor as well, as the exit gives their fund a success story and encourages fundraising efforts, while the new investment gives them the chance to reap further benefits from a favourite company with future growth potential.

However, alarm bells do begin to ring for many where transactions involving present and previous employers are concerned. Hichert concedes that corruption is "entirely possible" when moving from one company to another. "Like in M&A and the banking world, it does present the possibility of cheating your old partners or employer in favour of yourself or your new employer," he admits. One example of alleged wrongdoing was highly publicised in the UK last autumn, when private equity group Gresham and recruitment company Swift tried to sue HIG Europe directors Paul Canning and Andrew Mills, who both used to work for Gresham. It was claimed that they tried to destroy Swift's reputation so that HIG could buy the business on the cheap, although the court case was eventually dropped with no money changing hands.

Acquiring a previously owned company does appear to be a force for good in the vast majority of cases though. As well as proving that private equity can sometimes have a long-term presence in the lives of their assets, the phenomenon represents a key example of positive collaboration between industry and the asset class. As Hichert explains, "If the private equity manager hadn't been able to convince the management of his qualities then they would not have been very eager to get back together with him, and vice versa. This bears testament to the fact that in many cases private equity is actually a very well accepted and liked ownership model."

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