Hermes tilts towards separate accounts

The private equity investor has raised $389m for its third co-investment programme, which will invest alongside a further $230m through sidecars and separate mandates.

Hermes GPE has raised $389 million for its third co-investment vehicle with commitments from LPs such as Ardian, State Teachers Retirement System of Ohio and Canada Pension Plan Investment Board.

While the fund has a smaller pooled component than its predecessor, the $480 million 2014-vintage PEC II, the programme has a greater amount of capital to deploy when the additional $230 million of separate account money is included.

The move to include more separate vehicles follows demand from “one or two investors with slightly different investment reach to the mainstream”, Peter Gale, head of private equity at Hermes GPE, told Private Equity International. These mandates will either invest alongside PEC III, or in separate co-investment and alternative strategies.

The fund has so far committed $200 million across 30 investments and will target up to 45 in total, Gale said. It is targeting returns similar to the 23 percent net IRR and 1.6x total-value-to-paid-in recorded by PEC II.

“[PEC III will] last us through to next year when we’ll raise another pot,” Gale said, adding it expects to raise its fourth co-investment fund in mid-2018

“Almost certainly we’ll be having our next funding in the middle part of next year based on a very healthy dealflow and very exciting performance of the investments we’ve made. All current members are wanting to roll over their commitments, so at the moment it looks like it will be a very similar size.”

PEC III charges fees on a net asset value basis after the first year of formation and includes a 10 percent hurdle, Gale said. “We’re substantially lower than [the industry norm] because we think those fees are excessive.”

The fund will select investment targets with high visibility on earnings growth amid concerns over pricing. “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 added.

“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.”