Friday Letter Revolution and evolution

Darwinism was a term that surfaced frequently at this week’s EVCA Buyout Forum in Paris. One panel in particular – dubbed “Revolution or evolution?” – focused on whether the asset class, in its current form, still delivers and therefore merits “serious institutional capital”.

The consensus among speakers and delegates was that it does, so long as both GPs and LPs learn and grow from mistakes made during the frothy credit boom. And so long as they continue to work together to ensure interests remain aligned, as market conditions change. In some cases, this might mean reconsidering partnership structures. In others, industry contraction.

As if on cue, Candover Partners, one of Europe’s veteran private equity houses, revealed this morning that it is likely to wind down a fund that had initially planned to raise €5 billion. Having raised €3 billion, the fund was suspended in April when it became clear Candover Investments, the firm’s listed parent, would not be able to honour its €1 billion commitment.

Market participants are divided on whether or not this effectively will be the end to the remaining Candover team. Some believe a revamped firm will rise from the ashes and raise a new fund. Others argue its most prized deal-makers are likely to depart or retire, dampening fundraising prospects and further encouraging secondaries players to circle the firm’s assets. It is simply too soon to know exactly how the situation will play out.

Meanwhile, while some commentators are treating Candover’s downfall as a bellwether for the large buyout market, recent developments at Apax Partners – manager of Europe’s largest buyout fund – tell a totally, totally different story.

Following lengthy negotiations, the firm is close to sealing an unusual deal with the $200 billion sovereign wealth fund China Investment Corporation (CIC). In addition to taking a stake in the management company, CIC has offered to invest up to €800 million to acquire undrawn commitments from existing LPs in Apax’s €11.2 billion 2007 vintage fund.

While other large private equity firms have given their investors the chance to reduce commitments in light of LPs’ liquidity or over-commitment issues, this is the first instance in which the manager does not plan to reduce its fund size, but has found a new LP to backstop the commitments. While throwing some of its LPs a lifeline, Apax would also reinforce its LP base (and further validate its strategy) with the addition of a powerful partner.

CIC, for its part, is betting on the continued relevance of private equity – and large buyouts. It is a reminder that an industry in “contraction” is very different from an industry in demise. It may mean evolution, revolution and a few casualties along the way all at once, but it also means concentration on quality, and a leaner, meaner private equity industry. For the Candovers of the world, this is tough; for others there’ll be a bright new dawn.