What a dwindling DH says about private equity today

DH Private Equity Partners' departure is at odds with a vibrant fundraising environment.

Dick Hanson, a stalwart of European buyout, has finally called time on the firm he founded roughly three decades ago in a story that has been playing out since 2012.

DH Private Equity Partners, previously known as Doughty Hanson after its two founders, will be wound down and its remaining investments realised, Hanson wrote in an an email to limited partners last week seen by Private Equity International.

“It has become clear investors would require me, as founder and senior partner, to commit to the new fund as a super key-man for at least another ten years,” Hanson wrote. “This would require me to remain fully committed to the firm until I am at least 73 years of age.”

Hanson stated the fate of the firm rested on his ability to commit to the fund; in fact, the failure of the firm to get its new fund – launched with a €1 billion target in May last year – off the ground is due to multiple reasons.

Doughty Hanson’s 2004-vintage Fund IV held its final close on just over half its €3 billion target, according to PEI data. The firm managed to hit the €3 billion target of its next vehicle in 2007 but was forced to regroup in 2012 after the untimely death of co-founder Nigel Doughty.

Doughty had been a founding member of Standard Chartered Bank’s pioneering buyout unit in 1984, where he met Dick Hanson. In 1990 the pair established CWB Partners, a private equity joint venture between Standard Chartered and Westdeutsche Landesbank. In 1990 they spun out to form Doughty Hanson, which went on to become a leading member of Europe’s private equity establishment.

In 2015 the firm decided to abandon its fundraising efforts for Fund VI. The fund, which had been in market since 2013 in the hope of collecting €2 billion, was unable to reach a first close. Its rebrand last year was an attempt to return to the firm’s roots, and it closed all offices outside of London in an attempt to underscore its renewed focus.

That we are only writing about DH Private Equity Partners’ departure from the industry now shows the fundraising market is one in which even firms with a complicated story can hope to raise fresh capital. Fundraising climbed to $464 billion last year and firms collected $266 billion in the first three quarters this year. One-third of LPs expect to increase their target allocation to the asset class over the next 12 months, with just 3 percent opting to do the opposite, according to PEI‘s upcoming LP Perspectives Survey 2019, due to be published in December.

Strong LP demand does not mean GPs are looking at a free lunch. Lyceum Capital Partners decided to stop fundraising for its fourth flagship fund in January and switch to a deal-by-deal strategy, citing, among other factors, dampened post-Brexit sentiment. The firm rebranded as Horizon Capital and gathered £200 million ($257 million; €226 million) for European technology and business services firms in October, as PEI reported.

Hanson’s farewell email cites returns of 2x cost and a 25 percent gross internal rate of return, but neither Fund IV nor Fund V generated a net IRR north of 10 percent, according to a source with knowledge of the firm.

Fellow UK buyout firm Terra Firma Capital Partners will not be cheered by DH Private Equity throwing in the towel. The firm has experienced a string of senior departures while it is on the fundraising trail for the first time in more than a decade.

DH Private Equity’s departure reminds us – if it were needed – of the importance of succession in private equity. Almost 60 percent of LPs cited GPs’ succession planning and retention plans as a “major part” of their due diligence processes, according to the LP Perspectives Survey 2019.

One LP who has committed to DH’s previous funds cited high staff turnover in recent years as its primary reason for passing on the proposed Fund VI.

“It didn’t look like a particularly steady ship,” said the LP, who wished to remain anonymous. “Some of the good people who were there are not anymore. It’s a sad story.”

– Toby Mitchenall contributed to this report.