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Private-equity funds cash in while the selling is good Add to ...

Private-equity funds are unloading their investments at a record pace - evidence that the market has become more attractive for selling assets than for buying them, industry watchers say.

A report from London-based research firm Preqin Ltd. shows that the value of worldwide private-equity-backed exits from investments has topped $85-billion (U.S.) since the beginning of April - the biggest quarterly exit total ever, with almost half of the second quarter still to go. The number of exit deals, at 201, also looks on track to exceed the previous quarterly record, set in the fourth quarter of 2010.

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This rush to the exits continues a trend. Exit values and volumes have been at or near record levels for each of the past three quarters, dwarfing new acquisitions.

Private-equity analysts say the rising market values of many assets, thanks to the global economic recovery, has prompted private-equity funds to cash in their investments while the selling is good - and while they can finally, after several tough years, deliver some decent returns to their investors.

"Exit values are at record levels as fund managers take advantage of current market conditions to exit investments made both during the buyout-boom era [2006-2007]and post-financial crisis," Manuel Carvalho, Preqin's manager of private equity deals, said in the report. "While buyout deal flow as a whole has rebounded from the lows seen in 2009, entry deal flow is still a long way from the highs seen in 2006 and 2007."

The same trend is visible in Canada. Consulting firm PricewaterhouseCoopers reports that, so far in 2011, exits have accounted for nearly three-quarters of all private-equity transactions by dollar value - a reversal of the trend in the peaks of 2006 and 2007, when acquisitions made up three-quarters of the deals.

Seller's Market

Kristian Knibutat, Canadian deals leader at PricewaterhouseCoopers, said the reversal indicates that it's become a seller's market for assets.

"As the economy has improved, we've seen a rise in the valuations being paid," he said. "Now you have an environment where you can exit [investments]at attractive levels."

He added that the recovery of the market for initial public offerings of stock has created an attractive avenue for private equity funds to cash out on some of their investments.

On the other hand, there is rising competition for attractive assets, helped by the bolstering of corporate balance sheets following the financial crisis, which has created ample war chests for acquisitions at many companies. This has made buying new assets unappealing for private-equity fund managers.

"When you talk to the pension funds, they have a view that the market is somewhat overheated. They say they're going to be very disciplined about buying this year," Mr. Knibutat said, noting that asset valuations are back to where they were in the heated days of 2007. "On the other hand, it's a great environment for selling."

Feeling the Heat

In another recent report, consulting firm Bain & Co. Inc. said that after the lean times of 2008 and 2009, private-equity funds are feeling pressured to exit some of their holdings now that they have recovered.

"These [private-equity partners]will likely need to hit the fundraising trail again soon and will be motivated to realize investments - to feed capital through the [private equity]cycle but, more importantly, to show potential [investors]a real picture of the performance track record of their previous fund," the report said.

"Some holdings may not be ripe for sale in 2011, or possibly for some time to come," Bain said, noting that many funds active between 2005 and 2008 bought assets that were highly sensitive to the economic cycle and which have yet to fully recover.

"Many of these unrealized assets are still under water," it said.

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