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Hermes ponders UK growth fund post-Brexit

Brexit could lead to a 'rich vein' of growth opportunities in the UK, head of private equity Peter Gale tells PEI.

Hermes GPE, the London-based private equity manager with around $5.5 billion of assets under management, is mulling a domestic growth equity fund in 2018 amid concerns over the impact of Brexit, Private Equity International has learned.

The fund would seek to tap into a “rich vein” of potential growth opportunities that could emerge post-Brexit, Peter Gale, head of private equity at Hermes GPE, told PEI. Gale cited growing appetite among UK domestic investors, such as local authority pension funds, for investment in the “real economy” post-Brexit.

Peter Gale

Hermes, which held a final close on its $389 million co-investment fund this month, will also consider launching a fourth co-investment vehicle in Q3 2018 following strong demand from existing investors, Gale said. PEC III, which is expected to have deployed more than $200 million by the end of 2017, included commitments from ArdianState Teachers Retirement System of Ohio and Canada Pension Plan Investment Board.

Hermes has “radically altered” its investment strategy since 2011, shying away from vanilla buyout fund of funds to focus on growth equity stakes of up to 30 percent alongside co-investors. Although the firm will continue its fund of funds activity, Gale said the strategy harkened from a “different era” with lower return expectations.

Hermes now primarily targets direct investments in high-growth companies that are unlikely to be impacted by a potential downturn. Its latest vehicle is expected to make up to 45 growth equity transactions of around $5 million to $10 million, though it is “not afraid” of larger stakes.

“We’re nervous about markets in general and about the vanilla buyouts in particular, which we think are inflated by the loose money policy which has been the case now in the Western world since the global financial crisis,” Gale told PEI in October.

“We think asset valuations are very high and so one has to be very cautious about the standard private equity deals that are still relying on very high levels of gearing.”