PE continuation funds – “greed washing”?


As the investment of our workplace pensions moves inexorably into  private markets, we would do well to understand the perils (as well as the advantages) of using private equity funds and employing the very clever (but sometimes unscrupulous) firms that manage them). It is important that we read and listen to academics such as Chris Sier and particularly Ludovic Phallipou who consistently highlight the bad practice in private equity. We should also remember that good practice is also in evidence, I recently wrote about the share ownership culture being put in place by KKR and others to improve productivity and reward those who deliver it on the shop floor.

The FT is doing a good job of alerting us to the pitfalls that can beset us. One such is highlighted in today’s FT – it is the “continuation fund”.

The FT takes as examples Belron and the Access Group who we know as Autoglass and perhaps Access Payroll. Both have grown hugely over the past ten years through organic growth, acquisition and through the injection of private equity.

Access is now (privately) valued at more than the publicly quoted Sage while Belron is now valued at nearly £20bn. Belron has grown in value by 600% since 2-017, Access by a staggering 3800% since 2015. But how reliable are these valuations? The purchasers of shares in these businesses are not venture capitalists but pension funds and other institutional investors who are pouring money into funds run by the less than household names that appear in the image at the top of this blog.

The job of continuation funds is to replace capital supplied initially by the more entrepreneurial end of the private equity market, allowing those entrepreneurs to enjoy the kind of growth in valuation enjoyed by Belron and Access. But there is something rather worrying here.

Vincent Mortier, Amundi Asset Management’s chief investment officer, said this month that parts of the buyout business ‘look like a pyramid scheme’ because of ‘circular’ deals in which companies are sold between private owners at high valuations.

And who is making the money second time around?

Some of private equity’s own investors complain that the deals can in some cases serve to enrich buyout billionaires and multimillionaires at the expense of their pension fund clients by enabling them to keep levying fees. The Securities and Exchange Commission wants to reform the market, requiring more checks that valuations are fair.

And will the new investors get value for their money? The FT has concerns

private equity firms often arrange continuation fund deals without running a competitive sale process in which corporations or rival buyout groups are invited to bid. In those deals, the pension plans and other investors in the older fund selling the company say they cannot be sure they are getting the highest-possible price.

These funds look likely to be flush with cash as our workplace pensions scramble to diversify away from publicly quoted markets. There is every opportunity to make more money this way, so long as funds arrive for further continuation. The worry is whether this is sustainable.

As with much in private market investment, there needs to be a light shone on what is going on and questions asked that weed out bad practice. ESG claims are  under scrutiny, private equity valuations  should be too.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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