Guy Hands, the maverick founder of buy-out house Terra Firma, last week described the current era as “wilderness years” for private equity as opposed to the “Woodstock years” that preceded the financial crisis.
Investors are still recounting tales of the halcyon days of 2007 when some buy-out bosses sent scant emails to family offices asking them to commit capital to a vaguely described fund within a week.
The financial crisis has brought such practices to a shuddering halt. A sharp divide within private equity is coming to the fore – between those that have been successful and are able to raise new funds, and those that are struggling to collect capital.
“There is a real bifurcation happening in the buy-out world in general, and the area where you can see it most clearly is in the fundraising market,” says Steffen Meister, chief executive of Partners Group, one of the largest listed private equity investors in Europe.
Investors have embarked on a flight to quality by backing the best-performing brand names in the industry, some of which have returned billions of euros to investors from profitable deals.
In Europe EQT Partners, the Swedish private equity group part-owned by the Wallenberg family, has been a trailblazer for the sector, collecting €4.75bn ($6.34bn) in fresh capital in less than nine months in the biggest European buy-out fund raised since the financial crisis. This title will soon be taken over by BC Partners, the UK-based private equity group, which is on track to approach the upper end of its €6.5bn fundraising target by early next year.
Cinven, another longstanding UK brand name, is on track to collect about half its €5bn target by the end of the year, according to investors in the fund. Apax Partners, one of Europe’s largest private equity groups, is hoping for a first close on its next €9bn buy-out fund – €2.2bn smaller than its predecessor – early next year.
Apax’s target underlines how even market-leading private equity groups have been forced to scale down their ambitions. Even more striking is the reduction under way at Permira, which is aiming to collect €6.5bn for its next fund, more than a third smaller than its previous one.
In the US, a number of groups including Providence Equity Partners, KKR and Cerberus Capital Management are all targeting smaller buy-out funds than their previous ones.
But for almost everyone there is pressure on fees, with EQT, BC Partners, Cinven and Permira offering 5 to 10 per cent “early bird” discounts on their management fees to investors who sign up early.
“There is definitely downward pressure on fees in Europe,” says George Anson, head of Europe at HarbourVest, one of the largest private equity fund of funds in the world.
There are 1,728 groups globally vying to raise a combined $706bn in capital, according to Preqin, a research group – and investors say there is not enough capital out there for all of them. “Many buy-out firms are struggling with reduced fee levels for the first time and have seen prospects for follow-on-fund growth stall,” says Antoine Dréan, chief executive of Triago, a private equity fundraising adviser.
A number of private equity firms have already reduced their staffing levels, closed offices and either delayed the start of their fundraisings or drastically reduced their size.
The prime example is Mr Hands’s Terra Firma, which lost £1.75bn on the takeover of music group EMI and in the years after the financial crisis halved its staff to 60 people, although it has recently started to hire again. It hopes to approach investors next year to raise a fund of as much as €3bn – much smaller than its existing €5.4bn pool of capital.
Now Mr Hands plans to collect as much as €1bn in a separate pool of money from a sovereign wealth fund. This would enable Terra Firma to keep doing deals after the investment period of its buy-out fund runs out next year and until it can raise another full fund.
US private equity group Vestar Capital Partners is even retreating from Europe, having closed offices in Milan, Munich and Paris. Cognetas, the European mid-market firm, is shutting its former UK headquarters and has closed its Frankfurt office.
Mr Hands claims that the crisis years have prompted him to return to a more humble approach. “I’ve suffered enough pain in the wilderness years that I am not going to forget very quickly,” he said last week.
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