BC Partners, a UK private equity firm, has floated a “continuation fund” deal, one of Europe’s largest such deals, by transferring its 47 per cent stake in the academic publisher Springer Nature to a new fund that it will continue to control.
Continuation deals are a new trend in private equity where fund managers create a separate entity through the sale of its portfolio companies to themselves. Their modus operandi is to create a new fund and rope in new investors along with the old ones and transfer the company from the older fund to the new one.
These types of deals signify a huge shift in the way now private equity firms function. The purpose is twofold: to hold onto investments in the hope of making bigger returns at a later date, and to provide a potential exit for LPs (limited partners).
The deal values the company at about $7billion. The US private asset manager Neuberger Berman along with some other outside investors, as well as BC Partners’ 11th fund, which is its most recent one, will be investing.
BC’s ninth fund invested n Springer Science (as Springer Nature was then known as) in 2013, and those investors can either roll their money over into the new fund or take it back.
It’s “an example of our industry exploring creative solutions to retain high quality assets that still have a strong growth potential”, said Nikos Stathopoulos, a partner at BC.
The financial engineering in this kind of rollouts is complicated and BC has aptly code-named this project as Galileo.
Here are the mechanics of it. Springer Nature’s $7bn valuation is about €5.75bn. If just over €3bn of that valuation is debt and the rest is equity, then the €1bn-plus in the new fund will cover BC’s 47 per cent share of that equity, explains the FT.
BC’s ninth fund valuation was done by JP Morgan Chase and Neuberger Berman as the lead investor had to go along with it.
Most importantly, the deal allows BC to retain its stake in the company. The sale will contribute to its ninth fund’s carried interest pool in the exact same manner as a sale to an outside entity would have done. Additionally, a future sale out of BC’s 11th fund might lead to carried interest payouts again.
The advantage of a continuation fund is that PE firms get more wiggle room to hold on to companies longer and are a safe way to offer their investors liquidity.
“Given the crazy dislocations of the last year, there will be both strong assets that GPs may not want to exit yet, and weaker assets that have had a bad time but have strong fundamentals and therefore need more runway,” said Katherine Ashton, a London-based partner with law firm Debevoise & Plimpton who specializes in secondaries.
