London-based Hermes GPE has held an initial close on $150 million for its third co-investment fund.
Hermes GPE PEC III is seeking to raise around $300 million with a hard-cap of $400 million, targeting five to 10 investors.
It is seeking a small “club” of “major funds” that are compatible with the BT Pension Scheme (BTPS), for which Hermes GPE holds an exclusive private equity advisory mandate, the firm’s head of private equity Peter Gale told Private Equity International.
BTPS has already committed to the new vehicle along with a second unnamed investor that is a longstanding client.
“We are conducting a fundraising, but in a very selective way,” said Gale. “We are isolating like-minded LPs that understand that the prime exercise here is selecting the right assets at the right time and that want to build properly constructed co-investment portfolios.”
The fund’s predecessor, PEC II, closed on $480 million in September 2014 having raised capital from a club of investors including BTPS, State Teachers Retirement System of Ohio and the London Pensions Fund Authority, according to a statement.
“All the members in our club have major fund programmes,” Gale said.
The new fund will use its investors’ GP relationships and “harvest” co-investment dealflow “in an efficient manner, and from those opportunities we construct a portfolio of shares that we believe is right for this particular point in the investment cycle and the next five years”, Gale said.
It will source deals globally. “We have GP relationships all around the globe. Our club members have relationships all around the globe,” Gale said.
PEC III has yet to make any investments but “has a very full pipeline”.
In terms of strategy, Hermes GPE has “changed its stance radically” since PEC II. Gale said it was moving away from mature, larger buyouts in North America, the UK and Europe of “several billion in enterprise value”, to look at smaller and mid-sized buyouts of several hundred million dollars of EV.
However, PEC III is not size constrained, he added.
Hermes GPE has also changed its style to invest in opportunities with organic growth potential rather than financial engineering and leverage. This has prompted an expansion into growth markets including Eastern Europe, Africa and South-East Asia, including Malaysia and Indonesia, Gale said.
PEC II was the firm’s first co-investment fund raised from third party investors beyond BTPS and is now fully invested across 40 deals.
The firm is also actively investing for BTPS, which awarded it a £1 billion ($1.4 billion; €1.3 million) mandate in August to be invested over three years, split between funds and co-investments, as reported by PEI.
Hermes GPE is the private equity arm of Hermes Investment Management and manages private equity assets of more than $6 billion globally, including 185 funds and more than 80 co-investments, according to its website.