Europe A funding threat
From a private equity point of view, Basel II is a bad idea. Losing the banks as a source of capital could have serious consequences, especially in Europe. Much depends though on whether the pending proposals will be implemented in their current form.

How risky is private equity? Views differ, but one group that is taking a conservative stance is the committee of central bankers and banking regulators known as Basel.

The committee’s proposed new capital adequacy rules for banks (Basel II) have prompted intense debate across the financial services industry as a whole. Unsurprisingly, they have also caused a flutter in the hen hutch that is private equity. In late August, the European Private Equity & Venture Capital Association (EVCA) formulated a response to the pending proposals. It warned of dramatic consequences, arguing that the new banking rules could cause European companies seeking capital from private equity investors to lose €5bn to €10bn in equity financing.

Basel II aims to adjust the risk weightings banks would have to make on their investment in private equity or venture capital funds. In essence, banks would have to keep more money on hand than they currently do for every euro (or dollar) invested in private equity.

Currently, the European regulators require that banks keep eight per cent of cash on hand for investments in private equity: in other words, they must have €8m in reserves for every €100m invested in private equity or venture capital. The new rules would require that banks have approximately €24m for every €100m invested. Too much, says EVCA – the banks would simply walk away from the asset class.

EVCA insists the new rules are based on a flawed calculation of the inherent risk of venture capital and private equity. Investors in a defaulted private equity investment typically lose less than stockholders in a defaulted company lose, it argues.

But as the rules stand, they would indeed have a fundamental impact. According to EVCA statistics, banks provide almost one quarter of Europe’s capital for private equity and venture capital funds. In Italy, the figure is as high as 52 per cent whilst in the UK it is 16 per cent.

The Basel threat provides a reminder that European private equity remains too dependent on banks as a source of funding. Banks are notoriously variable in their appetite for private equity product even without regulatory pressures to scale back their exposure – not a that private equity fund managers, who prefer investors can be counted on to invest fund after fund, look for. Pension funds fit this profile better, but European schemes are still relatively cautious supporters of the industry compared to those in the US.

Much depends now on whether the proposals will indeed go through as drafted. Didier Guennoc, the public affairs director of the EVCA, commented: “The private equity industry is a tiny part the industry [that will be affected by the new regulations],” Guennoc said. “Basel II will go through but it is still being thought about.”

The Basel II rules are now undergoing a year-long process of consultation, both in Europe and the US. The rules should be finalised by the end of the year and implemented in 2007. There are number of parties already aligned in opposition. It’s noteworthy for example that rating agency Standard & Poor’s has also just signalled that it could well downgrade banks who rigorously implement Basel II as they think this will inhibit such banks’ ongoing profitability.

In taking their cause back to Basel, European private equity practitioners may take some inspiration from an episode in recent US financial history. In 1999, after Congress passed the Gramm-Leach-Bliley Act, which allowed bank holding companies’ merchant banking arms to act virtually in the same way as the merchant banking arm of financial institutions such as Goldman Sachs, the Federal Reserve decided that bank holding companies would have to hold 50 cents to every dollar involved in merchant banking activities.

This was universally lambasted by the banking community, and the Fed backed off. It essentially halved the requirement, requiring a 25 per cent deduction for every dollar of merchant banking investment if that investment represents 25 per cent or more of the bank holding company’s Tier 1 capital.

If there is to be a similar rewriting of parts of Basel II, Europe’s private equity industry must make sure its voice is heard. With their most important source of funding at stake, expect private equity practitioners to consider this a debate worth having.

Deals & Exits

MidOcean sells Center Parcs stake for €270
MidOcean Partners, the spin-out from DB Capital Partners, announced it has sold its 50 per cent stake in European holiday park operator Center Parcs Europe for €270m to Pierre & Vacances, the strategic buyer which already owns the remaining equity in the company. MidOcean and Pierre & Vacances acquired Center Parcs Europe in 2001 from Scottish & Newcastle for €673m.

MidOcean did not comment on the multiple achieved on the sale, but a source close to the transaction said the team were “proud of it”. It is thought that MidOcean paid approximately €91m for its ivestment in the business.

Center Parcs Europe operates 15 holiday villages in France, the Netherlands, Belgium and Germany. MidOcean will maintain its ownership of Center Parcs UK, which operates four villages in England. “The business had reached a level of maturity and accomplished a lot of the objectives we wanted to achieve when we bought it,” Graham Clempson, managing partner in MidOcean’s London office, said. “The timing suited us and Pierre in terms of their ambition.”

Bridgepoint backs Chrysalis TV unit MBI
UK mid-market buyout firm Bridgepoint Capital has reached agreement with UK-listed media and music group Chrysalis over the sale of its TV unit in a deal worth up to £51m €72.5m).

Bridgepoint is backing a management buy-in team which includes some of the major names in UK television, including Steve Morrison (formerly chief executive, Granada plc), Jules Burns (former managing director of operations, Granada plc) and David Liddiment (formerly ITV director of channels).

Bridgepoint has agreed to pay an initial £45m in cash, with an additional £5.8m to be paid over the next three years. Debt financing for the transaction was provided by Royal Bank of Scotland. Chrysalis is selling the business to focus on its music and publishing businesses.

BC Partners, management exit Trader Media
Guardian Media Group (GMG), the publisher of the Guardian and Observer newspapers in the UK, has agreed to acquire the 52 per cent of the equity of Trader Media Group (TMG) it did not already own from private equity firm BC Partners and TMG management. The transaction values the business at £1.14bn.

According to a statement GMG, which for the past year had been linked with a possible move for control over TMG, has agreed to pay £593m for the remaining shares. Prior to this agreement, GMG owned 48 per cent of the business, funds advised by BC Partners 46.8 per cent, and management 5.2 per cent.

“Since BC Partners first invested in Trader Media Group in 1998, the company has developed strongly,” said Simon Palley, managing partner at BC Partners. “Important milestones in the past five years include the merger with GMG’s AutoTrader division in May 2000 and the acquisition of the TNT magazine group in October 2000.”

La Caixa takes supermarket stake
Caixa Capital Desarrollo (CCD), the private equity unit of Spanish bank Caja de Ahorros y Pensiones de Barcelona (La Caixa), has provided development capital financing to Caprabo, one of Spain’s biggest supermarket and distribution groups. CCD has invested €200m in Caprabo in return for a 20 per cent stake in the business, made available via a capital increase by three Catalan families: Elias, Botet and Carbo, who retain the remaining shares in the business. Caixa will in return take two places on the Caprabo board.

West PE buys healthcare business
West Private Equity, the mid-market private equity unit of German bank WestLB, has backed a £33.4m (€48m) management buy-in at Clinovia, the UK-based operations of French-listed oxygen therapy group LVL Medical. Clinovia, which provides homecare and community healthcare services, is being backed by a new management team led by Robbie Burns (CEO) and David Lyon (CFO), both of whom are former main board directors of Nestor Healthcare Group.

Permira launches Debenhams bi
UK-based private equity house Permira has launched a recommended 425 pence per share offer for UK department store chain Debenhams in a deal that values the business at £1.54bn.

Permira intends to take a 37.5 per cent stake in the business, investing from its recently launched Permira Europe III Fund. Joining the firm in the bidding consortium are Goldman Sachs and The Blackstone Group, which will invest from their GS Capital Partners 2000 and Blackstone Capital Partners IV funds respectively. Both firms are set to take a 20.8 per cent stake in the business. A ten per cent stake has been allocated for existing management and senior employees of Debenhams.

CVC Capital Partners and Texas Pacific Group are working on a possible counterbid for the business alongside John Lovering, former chairman of Homebase, which was sold by Permira to GUS in November last year.

PAI Partners exits Michel Thierr
Paris-headquartered private equity firm PAI partners announced it sold its automotive fabric company Michel Thierry to a consortium led by the company’s management team. Michel Thierry makes fabric for car seats and door panels. In 2002, Michel Thierry recorded sales of €300m and EBITDA of €45m. The company employs 750 people. PAI partners acquired Michel Thierry in a €165m privatisation in March 2000, investing from the PAI LBO Fund. Financial terms of the disposal were not disclosed.

NIB in €115m Belgian chemicals MB
NIB Capital Private Equity, the private equity arm of Dutch pension funds ABP and PGGM, has announced it is to acquire the global methylamines and derivatives business of UCB, a Belgian-listed pharmaceutical and specialty chemicals company, for €115m.

The transaction is expected to close at the end of September when the business will be renamed Taminco. The current management team, who will take a stake in Taminco, will continue to lead the company.

“We could make good use of our knowledge of this chemicals niche in this transaction, which in terms of size and activity, fits perfectly in our buyout portfolio,” Volkert Doeksen, managing partner and chief executive officer of NIB Capital, said in a statement.

Montagu acquires ferry busines
Montagu Private Equity, the private equity firm spun out of global bank HSBC earlier this year, has acquired The Isle of Man Steam Packet Company. Montagu has agreed to pay £142m (€205m) for the business, sold by shipping and transportation business Sea Containers as part of plans to reduce company debt.

“This is exactly the king of high quality business that we like to invest in, with stable revenues and predictable earnings streams,” said Simon Pooler, a partner at Montagu Private Equity. “Steam Packet has an exceptional management team and good growth prospects as the economy of the Isle of Man develops.”

Montagu was advised by Ernst & Young and DLA. Debt funding for the deal was provided by Bank of Scotland Corporate Banking.

CVC backs IG Index PT
CVC Capital Partners, the London-headquartered private equity house, has made a 255 pence per share offer for UK-listed spread betting group IG Index.

The offer values the business at £143m and is at a premium of 40.5 per cent to the closing mid-market price of 181.5 pence per IG Share on 17 January 2003, the last business day prior to the announcement by IG that major shareholder and founder Stuart Wheeler was going to dispose of his stake in the business. “The market for spread betting continues to demonstrate considerable growth,” said Robert Lucas, who led the deal for CVC. “With the backing of CVC, the management team will be able to fully develop IG’s potential, and continue to build on their leading market share.” Financing for the transaction included debt facilities totalling £98m, of which £60m was underwritten by mezzanine specialist Intermediate Capital Group and £38m by Bank of Scotland Corporate Banking.

IK in secondary buyout from PA
European buyout firm Industri Kapital has made its first French acquisition of 2003 with the purchase of CEVA Santé Animale, a developer of animal health and nutrititional products. The business is being acquired in a secondary buyout from PAI Partners.

Since 1999, when PAI acquired the business from Sanofi-Synthélabo, the private equity group has made a number of bolt-on acquisitions to the operation, increasing turnover from €120m to €210m in the process. “We have made seven acquisitions since taking over the business less than four years ago,” explained Hervé Couffin, a partner at PAI. “It has proved to be a successful build-up.”

Financial details for the transaction have not been disclosed, although a spokesperson for PAI revealed that the transaction had produced an IRR of 35 per cent, and a multiple of three on PAI’s initial investment.

Funds & Buyside

Abingworth closes Fund IV at $350
Abingworth Management, the international life sciences venture capital firm, has enjoyed a very successful fundraising campaign for Abingworth Bioventures IV, the firm’s sixth life science venture fund, significantly exceeding the original $275m target to close on $350m. According to Abongworth, the fund was more than two times oversubscribed.

“This is a very satisfying result in what is generally regarded as a difficult fundraising environment,” said Stephen Bunting, managing director of Abingworth. “It was difficult not to take additional money from some very good investors but we decided that $350m was the limit that we should work with.”

Abingworth also announced that Allan Marchington and Raj Parekh have joined the firm as what it calls entrepreneurs-in-residence. They will work with the firm’s existing portfolio of companies as well as identifying new opportunities for investment.

Permira Europe III holds €3bn first clos
UK-based private equity house Permira is enjoying a speedy fundraising campaign for its third European buyout fund. In July the firm held a €3bn first close, only months after its Permira Europe Fund III was officially launched.

Permira Europe III has so far attracted 65 investors, of which 72 per cent, by value, are existing investors. Half of the investors are European, 40 per cent are from North America and the rest from the Far East.

The fund has a final target of €4.5bn plus or minus ten per cent. A final closing is scheduled for the autumn. Damon Buffini, managing partner, commented: “We are delighted with the high level of support from so many investors which has allowed us to move rapidly to a first close. We appreciate the confidence expressed by both existing investors and those new to Permira.”

Deloitte launches fund placement unit
Deloitte & Touche, one of the big four accountancy firms, has confirmed that it is planning to launch a private placement fund raising unit for the private equity industry. The unit will be headed by Chris Ward, head of the firm’s London corporate finance advisory team. Also responsible for running the business will be John Maxey, a senior tax partner at Deloitte also based in London at the firm’s private equity (Western Europe) team.

“The fundraising market has certainly been difficult this year, with many firms struggling to raise two thirds of their initial targets,” says Maxey. “However, it is also true to say that periods like this present the best opportunity for new entrants into the market because firms require the most assistance with the fund raising process.”

Ergo to take over IMH fund management
Reflecting the continuing difficulties facing venture capital firms in the current market, German venture capital firm IMH Venture has ceded control of its three venture capital funds to Ergo Equity Partner, the private equity arm of the Germany-based Ergo Insurance Group.

According to a spokesperson for Ergo, IMH had failed to put sufficient funding in place for its third IT-focused fund, which had initially targeted a €150m final close. “The lack of funding at IMH had led to a danger of insolvency and so the funds’ LPs have agreed on a solution which will see Ergo take over the funds and bring some muchneeded stability.”

Since 1999, IMH has set up three venture capital funds with a total volume of approximately €100m. Ergo’s principal objective, according to a spokesperson, is initially to stabilise the existing portfolio of 20 investee companies.

Adriatic fund holds €30m first close
Slovenian brokerage Poteza has held a first close for the Poteza Adriatic Fund, raising an initial €30m for investment in South Eastern Europe. The fund, which has a final target of €75m, has so far secured investments from around a dozen financial and industrial groups in Slovenia. The firm now intends to seek commitments from international investors.

Slovenia, the northernmost republic of the former Yugoslavia, has enjoyed steady growth since secession and has higher GDP per capital than other states of the former Yugoslavia. “Slovenia has progressed well during the last decade and we intend to use our knowledge of our local market to support the growth of other states of the former Yugoslavia,” said Rok Petric, one of four partners managing the fund.

€115m final close for Accession Mezzanine
Mezzanine Management, the London-headquartered mezzanine finance provider, has held a final close of Accession Mezzanine Capital (AMC), which is specifically targeting buyout transactions in Central Europe.

AMC has received a total of €115m and attracted commitments from 13 institutional investors from seven countries, with investors based in Austria comprising just over a third of total commitments.

“Central Europe presents an attractive investment opportunity for mezzanine, largely driven by the favourable prospects in advance of EU accession, a rapidly expanding private equity marketplace and the clear need for long-term subordinated financing for growing companies,” said Franz Hoerhager, managing director of Mezzanine Management Central Europe.

EBRD backs Euroventures’ Hungary Fund III
Euroventures Hungary, the Hungarian private equity firm backed by ABN Amro, has secured a €15m commitment from the European Bank for Reconstruction and Development (EBRD) for its latest fund, Euroventures Hungary III.

The EBRD investment will be made alongside Hungarian pension funds through a specially designed investment vehicle. It is the first time that the pension funds are accessing the asset class.

The fund, which has a final close target of €75m, will invest in medium-sized companies at the buyout, expansion or development stage, investing between €2m and €5m.

LCF Rothschild holds €87m first close
LCF Rothschild Capital Partners, the French private equity firm backed by the Edmond de Rothschild Group, has held a first close of its debut private equity fund at €87m, with a €200m final close pencilled in for early 2004. The Edmond de Rothschild LBO Fund, launched last October, received a €30m commitment from the firm’s sponsor.

According to joint managing partner Eric de Montgolfier, who along with Erick Fouque joined the firm from Paris-based Astorg Partners last year, the fund now aims to attract investors from the US and Europe. The firm has hired Altium as placement agent for the overseas fundraising.

Charterhouse closes on €2.7bn
Charterhouse Development Capital, the London-based buyout firm that bought itself out from HSBC in 2001, has announced the final close of its latest fund, Charterhouse Capital Partners VII at just over €2.7bn. This figure is higher than the most recent revised target total of €2.5bn which had circulated in May. Originally the aim was to raise a total of €3bn when marketing for the fund started in earnest in early 2002.

Aletheia Partners to raise debut fund
Robert Tchenguiz, the Iranian businessman who recently launched an ultimately unsuccessful bid to acquire UK department store chain Selfridges, has unveiled plans to enter the European private equity market.

Tchenguiz, who specialises in real estate investments, has joined with Scott Lanphere, a former director of Morgan Grenfell Private Equity. The two intend to raise a fund targeting investments in companies with sizeable property assets.

Tchenguiz said he plans to raise between £300m and £500m to invest in companies with existing management teams to run property-based businesses with solid cashflows.

FLV in talks to sell portfolio
Flanders Language Valley Fund (FLV Fund), the Belgian venture capital firm that has had a torrid past few years, has announced that it has entered into exclusive negotiations with a secondaries specialist over the sale of its entire investment portfolio of speech technology investments.

Asked whether a secondaries sale was the best route to liquidity, FLV spokesperson Piet Vandermeersch said: “Every option has advantages and disadvantages but [a secondaries sale] is a good road to explore. It is also important to point out that it is far from a done deal at present.”

AVentures launches $50m Ukraine fund
AVentures, a Ukrainian venture capital company, has added to the recent spate of fund launches in countries of the former Eastern Bloc with plans to organise a $50m fund targeting Ukraine’s high-tech industry. The fund, which is being co-sponsored by the National Space Agency of Ukraine and several other government agencies, has already secured commitments from a group of local investors and one unnamed US institution.


Cinven strengthens France, Germany
European private equity firm Cinven has announced a brace of appointments at its continental offices, continuing its strategy of sourcing European investments from local offices. The firm has appointed Thierry Célestin and Bruno Schick as investment executives at its Paris and Frankfurt offices, respectively. Célestin joins the Paris office from Lazard, where he focused on transactions in the media sector. Schick joins in Frankfurt, having spent three years in the investment banking division at Goldman Sachs.

GM’s Flynn joins Coller Capital
Susan Flynn, the former CEO of General Motors Asset Management’s (GMAM) UK arm, has joined London-based secondaries specialist Coller Capital as an investment director. She will be responsible for deal sourcing and structuring.

At GMAM, Flynn concentrated on investing in private equity funds predominantly in Europe. Her departure ends an eight year stint at the group, during which she also worked in the firm’s US office. Prior to joining GMAM, Flynn worked at Rothschild Asset Management in London.

International tie-ups for Helix
Helix Associates, the UK-based placement agent, has announced details of its second international partnership in two months, this time boosting its presence in the Australian market via an agreement to co-operate with local group Principle Advisory Services.

Principle, a placement and advisory business set up by Les Fallick, will place Australian and foreign funds with Australian investors and, via the Helix link-up, advise Australian-domiciled funds on appetite for their offerings with international investors. Private Equity International talked to Fallick for this issue’s Asia Monitor.

In July, Helix announced a joint marketing initiative with Boston-based Monument Group to provide placement services for major private equity funds, following the successful joint-placement of the Altor fund in June, which closed on €650m.

CapMan adds to life science team
CapMan, the Nordic private equity group headquartered in Helsinki, has added to its life sciences team, which is headed by Jan Lundahl, with the appointment of Yrjö Wichmann as investment director. Wichmann previously worked in D.Carnegie AB’s Finland branch as a director in corporate finance, responsible for the life science and healthcare sectors.

Jan Lundahl said the appointment of Wichmann was part of the firm’s intention to expand the life sciences team across the region. “Wichmann will play a key-role in our expansion in Finland,” said Lundahl. “During the fall of 2003 we will also continue our unit’s expansion in Denmark.”

RBS expands leveraged team
RBS Leveraged Finance, which is part of the structured finance business of the Royal Bank of Scotland, has made two senior appointments at its London headquarters.

Mike Potter is joining the RBS leveraged finance syndications team based in London as a director. Potter was previously at West LB in London as an executive director in syndications, working on leveraged deals. Also joining the leveraged finance team is Thomas Wolffe. Wolffe comes in from Deutsche Bank, where he was a director based in Frankfurt. Both will report to David Yeoman, head of leveraged finance syndications for RBS.

Carlyle hires Munich-based director
Carlyle Group, the US-headquartered private equity firm, has made a further addition to its European team with the appointment of former Merrill Lynch banker Eric Fellhauer.

Fellhauer joins the US firm’s German team of directors and will be based in Munich. Prior to joining Carlyle, Fellhauer was a senior member of the M&A team of Merrill Lynch for five years in both their London and Frankfurt offices. Before that he worked with Deutsche Bank for four years.

Merlin Biosciences sets up in Finland
Merlin Biosciences has announced the launch of a Helsinki office which the firm hopes will further consolidate its position in the Nordic market. Merlin’s Finnish operations will be run by newly appointed Niilo Santasalo, formerly a senior investment banker at PCA Corporate Finance.

“The Finnish industry, although young, is rapidly emerging and will benefit from the presence of an international VC such as Merlin to help build and sustain solid biotech businesses,” said Mark Clement, general partner at Merlin.

“We are fortunate to have Niilo Santasalo join us to spearhead the Finnish operation. His local industry knowledge and global perspective is a key asset to Merlin as we explore investment opportunities.”