Doughty Hanson & Co, a European buyout firm, has become the latest group to turn to public markets for funding, confirming its intention to follow rivals Kohlberg Kravis Roberts and Apollo Management, and list a €1 billion ($1.3 billion)vehicle on Euronext.
The listed vehicle will invest into the traditional €2.5 billion private equity fund Doughty Hanson is due to begin fundraising in the next month, according to banking sources.
A banking source familar with Doughty Hanson’s plans said it would not be following the example of KKR, which tripled its fund’s size on the eve of the offering. The firm is understood to have a hard cap on the fundraising of just under €1.5 billion. The source said: “It is no criticism of KKR. Its offering sucked every last cent of money that would have been in the aftermarket.”
The more modest fund size may head off concern’s that investor appetite has been sated by the two previous offerings, market sources said. Doughty also hopes to overcome investor inertia by committing €40 million in cash to the vehicle to offset the initial costs associated with a listing.
The money will be used to absorb cost in exchange for options and will mitigate the impact on the fund’s net asset value, Doughty Hanson said.
The source said investors in similar funds had been piqued by banking costs which had seen 5 cents going to the banks for every €1 raised. Cititgroup and Goldman Sachs are joint bookrunners on the offering.
Similarly, the fund is adopting a partly paid structure, where 60 percent of the price of units in the fund will be paid at the time of the offering and 40 percent 12 months later, to reduce the cash drag on returns common to such vehicles.
As a further inducement to invest Doughty Hanson has said it will not receive any carried interest until net asset value growth covers the formation costs in excess of those paid by Doughty Hanson.
Carried interest is subject to an 8% hurdle rate and 25 percent of the carry payable to Doughty Hanson by the publicly-listed vehicle will be reinvested in units in the publicly-listed vehicle.
One financial sponsor coverage banker at a US investment bank said: “Doughty has thought about this and they have worked hard to make this attractive to investors. Apollo was a hard sell and there was some concern that the window had closed for other listings.”
A source close to Doughty Hanson said investors had welcomed the appointment of Fred Watt, formerly chief financial officer of the Royal Bank of Scotland Group, as chief financial officer of the fund, alongside Nigel Doughty and Richard Hanson, Doughty Hanson’s founders.
Watt worked alongside Hanson at County Bank in the 1980s.
Christopher Chambers, formerly chief executive officer of Man Investments, Robert Meuter, formerly vice chairman of wholesale bank ABN AMRO, and Nicholas Moss, formerly a managing director within the Rothschild Trust Group, will join as independent directors on the board after the listing.
Watt said a lot of thought had been given to the structure of the fund and composition of the board to allow the managers to get on with investing money. He said: “The fund is just another source of capital accessing a different and wider shareholder base. It should not make any difference to the people investing the money.”
The listed vehicle’s primary objective will be to achieve long-term growth in value for its unitholders by investing in funds and portfolio companies managed by Doughty Hanson
At least 80% of the proceeds of the offering will be invested in Doughty Hanson’s funds and in co-investments in Doughty Hanson’s portfolio companies and real estate acquisitions.
Up to 20% may be invested in opportunistic investments, such as minority investments in mezzanine facilities in connection with Doughty Hanson’s acquisitions and other opportunistic investments which are outside the criteria of the existing funds.
A source close to the firm stressed it would be sticking to what Doughty Hanson did best.