February 10, 2007
Private equity firms are selling more companies to one another as money flows into the buyout sector, competition for assets increases and some of the traditional avenues for divesting their investments dries up.
Yesterday's US$1.65 billion acquisition of nutritional products, vitamin and diet pill retailer General Nutrition Centres Inc. is a prime example.
In that deal, the private equity investment arm of Ontario Teachers' Pension Plan and Ares Management LLC will each pay half of the purchase price to seller Apollo Management LP.
Founded in 1990, Apollo's acquisitions include last year's club deal for casino operator Harrah's Entertainment, and the purchase of General Nutrition in 2003 for US$750 million.
"This is more likely to be prevalent because of all the capital, and the relative scarcity of good assets relative to this large amount of cash," said Phil Brown.
Indeed, seeing private equity firms on both sides of a deal is becoming the norm, said James Leech, senior vice-president at Teachers' Private Capital. In the past couple of years, Teachers' has bought a number of companies from private equity firms.
Buyout firms try to purchase companies at a discount with the view to fixing them and selling them for big profits in a few years.
Pension funds, with their longer investment time lines than buyout funds, may be logical buyers for such assets. In Canada, private equity firms may also turn to each other as they look for alternatives to the income trust offering, a popular exit strategy that ceased to exist when the government said it would start taxing trusts the same way as corporations in 2011.