To play devil's advocate, the reason a private equity firm should use a continuation is that it wants to hold an asset past the fund's 10-year life because the asset is continuing to perform very well. 10 years ago, many private equity firms felt heartburn from letting big software winners go after 5 years because that's the typical fund cycle.<p>In reality, LPs and GPs would have been better off reliably holding the same growing asset for 15-20 years as the company went from $10M in EBITDA to $250M. Why take a 3x in 5 years when you can get a 25x in 15 years? The annual compounding works out to be roughly the same. The only issue is your fund structure so you trade it amongst yourself every 3-5 years at a 3-4x mark that makes you look good to your investors. The growth is usually there so it is not a lie though liberty may be taken with multiples which expanded rapidly over the last decade.<p>This phenomenon has been used aggressively, perhaps too aggressively, in software and particularly software roll-ups where you can comfortably compound 20-30% EBITDA growth annually between 10-15% organic growth (half or more of which is just price increases) and an aggressive M&A strategy that drives higher margins.<p>That said, this article is raising an early and important alarm bell to the broader public, who have a vested interest because their pensions are invested in these firms, that certain firms may be using it too aggressively. When I scan the broader PE landscape, the firm that has used it to the most success is Clearlake Capital. I don't have insight into their whole portfolio but have heard criticisms that they overuse it. Or that their is incestuous trading of assets between them, TA Associates, Hg, Insight Partners, FP, Thoma, and a handful of others.
Yeah, this is what happens when institutional investors decide to throw their money into poorly regulated private equity vehicles.<p>If only we had some mechanism whereby companies' shares could be listed somewhere public, and people could buy and sell them to determine what a fair price for these companies would be! Oh, better yet - we could have a regulatory body that could prevent companies from selling the same asset back and forth to themselves to inflate the price. Crazy, right?
It seems like there are two issues:<p>1. The GP arranges for one of its funds to buy from another fund. These funds likely have a different mix of LPs. Because both funds are represented by the same GP, there's no competitive negotiation, and the valuation chosen may benefit one group of LPs (and possibly the GP) at the expense of the other.<p>2. Such a transaction can increase the total fees earned by the GP, even without additional effort or additional value being created or realized.
It's kind of funny to me that this stuff happens. You can dress it up however you want, but it's fundamentally just putting these PE groups in an unethical position. You can't with a straight face say that you're getting the best price for both the investors you're selling it from and the investors you're buying it for. Firstly, there is no way you can correctly value these companies when you're selling them between your own funds. Just laying aside the mechanisms of how this is done, anyone investing in those groups should be taking a long hard look at whether you want people this unethical to manage your money.<p>And of course that doesn't even start to consider the fact that by doing this the PE companies get to mark their own homework, fraudulently pumping valuations by self-dealing safe in the knowledge their valuations don't need to be tested against the public markets.<p>This just seems like the exact same sort of absurd regulatory loophole that saw SPACS explode and then implode over 18 months. The fact that these firms have been forced to start chasing this style of innovation is not a good sign for the core business.
Tangentially, I had dealings with The Access Group when I was head of finance at a hospitality group.<p>Access were full of lies. They bought up many category leaders for hospitality software, and tried to sell a single solution that then didn't really work together.<p>Their sales teams were aggressive, but their solution "made sense" to other decision makers even though Access couldn't really deliver.
If I bought a painting and sold it to myself for more money, I'd get investigated for money laundering. These people are taking things with no established market values and self-dealing with them. It reeks of fraud and misdirection.
This reminds me in no small way of Max Fosh in his real-yet-satirical take <a href="https://youtu.be/iHfJRON3b-w" rel="nofollow">https://youtu.be/iHfJRON3b-w</a>
Is it true being acquired by PE is a death sentence for engineers at a company? With P.E introducing cuts & offshoring immediately to improve their bottomline