After nearly 16 years, L Catterton is holding onto one of its portfolio companies through a newly created secondary fund, one of the latest examples of fund managers creating liquidity without the benefit of a conventional exit.
The private equity firm said Friday it has closed a continuation fund for PatientPoint Health Technologies, which it acquired in 2007. The deal aims to allow some LPs to exit, replaced by newcomers such as lead investor Neuberger Berman and Fortress Investment Group. Financial terms of the deal weren’t disclosed.
Cincinnati-based PatientPoint is L Catterton’s longest-held active majority investment, according to the firm’s website. It provides doctors with products for patient engagement and education.
PatientPoint entered a new phase in 2021, when L Catterton merged the company with Littlejohn & Co.-backed Outcome Health, saying it planned to conduct more add-on deals. Littlejohn maintains a stake in PatientPoint following the new fund’s closure.
Continuation funds and GP-led secondaries have grown in importance because of the current market’s prolonged absence of conventional liquidity events like acquisitions and IPOs.
GPs create continuation funds, which can range in scope from multiple companies to a single asset, as a way to allow existing LPs to exit a long-running investment while bringing in fresh capital. And GPs use the vehicles to hold onto valued assets in weak markets or to buy time to boost valuations by growing the portfolio company.
Andrew Taub, a managing partner at L Catterton, said in a statement that the deal provides liquidity to investors, adding that his firm intends to continue supporting PatientPoint.
L Catterton’s recent investments include Chinese pet food company Partner Pet, cosmetics brand Dibs Beauty and Colorado-based restaurant chain Urban Egg.
Since a valuation peak in mid-2021, median purchase price multiples have fallen 16% for enterprise value to EBITDA, while EV-to-revenue multiples fell 24%, according to PitchBook’s Q2 2023 Global M&A Report.
Among other factors, those lower deal prices have held PE firms back from exits, which plummeted during the same time period. Despite a slight recovery in Q2, exit value remains below pre-pandemic averages, according to PitchBook’s Q2 2023 US PE Breakdown.
Under a proposed rule change by the SEC, GPs planning to move assets into continuation funds would be required to get independent opinions to ensure fairness.
The Institutional Limited Partners Association drafted new guidance that outlines the factors that make for a well-run process creating and closing continuation funds.
“Many LPs are forced to take the default option of selling due to policy, bandwidth or other constraints, and they can feel a bit taken advantage of when you combine that with the conflicted nature of the transaction,” said Aaron Daley, one of the co-authors of the guidance, at a PitchBook webinar in June. Daley is an assistant senior investment officer for the Washington State Investment Board.
Featured image by Bogdan Kurylo/Shutterstock
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