Hermes GPE, the private equity arm of Hermes Investment Management, expects to hold a first close for its third co-investment fund before the end of the year, Hermes GPE head of private equity Peter Gale told Private Equity International.
Hermes GPE PEC III is targeting $300 million and could raise as much as $500 million, Gale said. The fund is looking to attract around five to 10 limited partners that “are on the same wave length,” Gale said.
Hermes GPE PEC II, which closed at $480 million in 2014, is about 82 percent invested, having made 28 transactions and with a further three pending completion, according to a statement. Given its focus on growth investments of about $10 million, it is expected to make another five or so before it is fully invested by the end of the year, Gale said.
Gale noted that its first co-investment fund was solely comprised of commitments from the BT Pension Scheme, which is also its largest client. BTPS now accounts for about 50 percent of its assets under management but is expected to drop to a third when other clients come on board, he said.
Hermes GPE is owned by management and Hermes, which is owned by BTPS.
“We have created an investment club around BT of institutions that think the same way and use us to deliver that strategy,” Gale said.
PEC II was open to other clients and its third vehicle will be the same, Gale said, declining to comment on how much BTPS was expected to commit to PEC III.
Hermes GPE announced on 10 August that it had received a £1 billion ($1.6 billion; €1.4 billion) private equity mandate from BTPS, following on from its previous £900 million programme initiated in 2011. The new funds will be invested over three years and split between funds and co-investment opportunities, according to the statement.
The new BTPS programme retains Hermes GPE’s focus on co-investments but differs in that it will target more growth investments and ‘growth economies’ beyond its established markets of the US, UK and Europe, including south east Asia and Africa, Gale said.
“We had a focus previously [on growth markets] but we haven’t followed through with investments. Right now we are finding better value and risk-reward trade off there,” Gale said.
The firm is stepping back from large and mid-sized buyouts and will focus instead on businesses with an enterprise value of about $500 million “with legs left in them.”
The switch in strategy is a response to “full” asset prices, buoyed by “an enormous roll out in liquidity” driven by rising stock markets and plentiful credit, Gale said.
He noted that the previous cycle, in which valuations were not so extreme, “was heaven for vanilla PE and we filled ourselves to the gunnels” but the firm was now taking a niche approach.
Hermes GPE’s focus on co-investments in the growth end of the market means it will have to work a lot harder with its existing and new managers, including with smaller general partners, to source deals and get exposure to the right markets, Gale said.
Hermes GPE advises its institutional clients on developing private equity portfolios covering co-investments, primary funds and secondary investments with $4 billion of assets under management, according to the statement. It is currently invested in more than 200 funds and 80 co-investments, its website said. It is part of Hermes Investment Management, which has £30.1 billion of assets under management.