HQ raises its largest-ever fund of funds vehicle amid Asia push

The German fund of funds manager gathered $150m more than its original target for Fund VIII.

HQ Capital has held a final close on its eighth global fund of funds.

The firm raised $750 million, surpassing its $600 million target after roughly a year in  market.

HQ expected a final close on Auda Capital VIII by the end of Q1 this year, as previously reported.

“There was additional interest from new LPs in the end, given the market sell off”, HQ Capital managing director and head of global private equity Stephen Wesson told Private Equity International. “If you have capital now, it’s a great time to get it into the hands of PE managers to take advantage of the opportunity.”

Limited partners in the fund are a mix of existing and new institutional investors, who are predominantly Europe-headquartered, he added.

Fund VIII is double the size of its 2015-vintage predecessor, Auda Capital VII. Fund IV, a 2005-vintage, North America-focused fund, raised $402 million for its main fund and $351 million for co-investments, according to PEI data.

Approximately 70 percent of the fund is earmarked for primary investments in the small and mid-cap space, 20 percent in secondaries and 10 percent in co-investments.

While 15 percent of the capital has been called, 70 percent of the capital has been committed. The remainder will be used to back additional managers, selective co-investments and secondary transactions, over the next 12 months, Wesson said.

Capital raised for vehicle will be invested globally, with about half set for Asia, the region with the highest investor demand, according to Wesson. PEI reported in November that more than half of the fund was earmarked for Asia, which had slightly adjusted when the firm wrapped up fundraising last week.

On investor demand for Asia, Wesson noted the firm has seen “pretty steady interest from its clients.” He added that the view from the firm’s clients is that the region is a growth story with less private equity capital and attractive opportunities with the right managers.

“There will be some back and forth with the US-China trade from a political standpoint. However, from a business formation and growth perspective, the firm does not see the opportunity ending,” he said.

The firm previously backed funds managed by Shanghai-based ClearVue Partners, Trilantic Capital Partners Europe and Mandarin Capital Partners, according to PEI data.

The firm is also seeing interesting opportunities in co-investments and secondaries amid the market dislocation. Wesson noted a priority for the firm’s PE team is “to assess the development of the specific portfolio companies as a result of covid-19 to identify opportunities to invest”

These co-investment opportunities, which are typically no fee and no carry for HQ Capital’s LPs, include taking existing businesses that are in good shape and putting in additional capital “to take advantage of market dislocation to do something offensively”, he said.

HQ will be targeting companies in the healthcare, business services and consumer-oriented space, among others.

In the secondaries market, the firm is focused on smaller deals of between $10 million and $50 million, with sellers that need liquidity as well as those repositioning their portfolios for strategic reasons.

On generating returns in amid the market downturn, he noted HQ Capital is focused on creating diversified portfolios for its LPs.

“We are not trying to hit home runs. We are trying to provide a premium to the public markets and do that year in and year out,” he said.

HQ had $9.9 billion of assets under management as of the first quarter of 2020, according to the firm’s website.