Going private

Andy Thomson explores how Montagu Private Equity’s new fund stands to receive a €100m commitment from private clients of HSBC.

There’s more than one way for a private equity fund to diversify its investor base, and UK-headquartered European buyout house Montagu Private Equity is providing a good illustration of this amid fundraising for its latest vehicle, which is capped at €2 billion.             

On the one hand, Montagu is taking its story to a wider audience: reports say the firm is seeking to expand its base beyond Europe by targeting LPs in the US and Canada. On the other, a new syndicate launched by a unit of its former parent organisation HSBC is ensuring that it continues to steadily increase its exposure to private capital and thus avoid an over-reliance on institutions. 

The syndicate provides access to private equity for clients who would not normally be able to meet the minimum subscription level if they were investing directly into a fund as a high net worth individual.

Jamie Murray, head of marketing, HSBC Republic Investments

The latter development is being enabled by HSBC Republic Investments, the alternative investments arm of HSBC Private Banking, which has just launched HSBC European Private Equity Syndicate II. The Syndicate will aim to raise €100 million from the bank’s private clients to invest in the Montagu III LP, which has a €2 billion cap. The new syndicate is the successor to a pool that raised £58.5 million (€86 million) for investment in the predecessor Montagu (then known as HSBC Private Equity) fund, a 2002-vintage vehicle that also sought – and closed on – €2 billion.

“We’ve just started fundraising, and the level of demand is very encouraging,” says Jamie Murray, head of marketing at HSBC Republic Investments. Minimum investment in the syndicate is €250,000 per person and the subscription period lasts until the end of June 2005.

Murray points to mutual benefits associated with GPs’ raising money from private sources. “The syndicate provides access to private equity for clients who would not normally be able to meet the minimum subscription level if they were investing directly into a fund as a high net worth individual. From the point of view of the GP, it is a good source of diversification: although the private bank is the ‘official’ LP, you might have a hundred or more underlying shareholders.”

Joining this club doesn’t come cheap, however. For Syndicate II, HSBC Republic Investments is charging a placement fee of up to three percent of the aggregate commitment; a management fee of 1.25 percent per annum based on net asset value; and a performance fee of five percent of distributed income and realised gains received by the syndicate from the fund. And this is on top of a 1.75 percent per annum management fee and 20 percent carried interest being levied by the fund.

Investors are also gambling on performance that is, as yet, unproven. In a statement, HSBC Republic Investments said its investment in the previous fund had generated a net appreciation, including distributions, of 24.4 percent for the three-year period from 30 September 2001 to 30 September 2004. However, Murray says this is based on just two realisations from the fund, which is currently between 70 to 80 percent invested.

HSBC Republic Investments was formerly the alternative asset investment arm of Republic National Bank of New York, which was acquired by HSBC in 2000. Paul Dunning, formerly chief operating officer of Goldman Sachs, who remains chief executive today, founded the original business in 1995. As part of Republic National Bank, the business had organised syndicates investing in funds raised by US-based managers including Apollo Advisers and Carlyle Group. However, its main focus – then and now- has been on offering clients access to hedge funds.

Previously known as HSBC Private Equity when it was the captive private equity arm of HSBC, Montagu Private Equity spun out in 2003 when HSBC sold an 80.1 percent stake to its management team and retained 19.9 percent. HSBC accounted for around half the commitments to the 2002 fund from its own balance sheet. The fund had only 11 limited partners in total.