Juggling act: how buy-and-build firms manage multiple funds

The Dutch firm's investment model allowed it to raise its latest €2bn vehicle while Fund VI was around 40% deployed.

Waterland Private Equity Investments is known as one of Europe’s best performing managers. What isn’t so well known is the firm’s approach to timing its fundraises with investment pace.

The Dutch firm has at least three fee-earning funds in the market and managed to raise its seventh fund while its previous vehicle was less than 50 percent invested, according to three sources familiar with the firm.

Waterland’s ability to employ such a model may lie in the buy-and-build model at the heart of its investment thesis. When the firm acquires a platform, it reserves fund capital for future add-ons and deploys this over a longer period of time than a traditional buyout fund.

By the time Waterland is 50 percent invested in platform companies, it has probably accounted for most of the fund’s equity, which will have been allocated for follow-on investments. This allocation is reviewed over time.

The model is not unique to Waterland. Another European buy-and-build firm that did not wish to be named told Private Equity International it typically raises a successor fund at less than 75 percent deployed when all of the capital in the predecessor is committed to its platform investments. Like Waterland, this can result in an overlap of three funds charging management fees at any one time.

“Usually this overlap only lasts two or three years, depending on deployment,” a source at the firm noted.

Waterland declined to comment for this piece.

Lengthy investment periods are not a prerequisite of the buy-and-build strategy. London-headquartered buy-and-build specialist Silverfleet Capital also reserves capital for bolt-ons, typically deploying around 90 percent of this within the standard five-year investment period, partner Gareth Whiley told PEI.

“If there was a mind-blowingly successful deal we ought to do and it was very late, we would be willing to talk to our investors and see whether they’d be happy for us to do that,” Whiley said. The firm has not sought to alter its investment model to enable it to make late deals without having to ask for LPs’ permission, he noted.

“In the market segment we operate in, if I had to deploy half the fund in the second five years into follow-ons, I think there would be a danger of compromising on stuff that doesn’t quite fit. It’d be scale for scale’s sake.”

Less uniformity

Fund terms are becoming less uniform as LPs seek to avoid paying excessive fees, according to Eamon Devlin, managing partner at law firm MJ Hudson.

“Over the past 12 months LPs have realised managers could be drawing fees from multiple funds, and newer funds often have restrictions so managers can’t earn excess cash. Some now say you can’t charge management fees if you’re still drawing from a previous vehicle,” Devlin said.

Buy-and-build has grown in popularity in recent years, in part to avoid bloated prices at the larger end of the market. Silverfleet Capital’s Buy & Build Monitor, published in November, reported a provisional total of 320 add-ons in Europe for the first half of last year, up from 302 year-on-year.

Investors are rewarded for their patience, with the 2011-vintage Waterland Private Equity Fund V having earned a 2.1x net multiple and 39.4 percent net internal rate of return as of September 2016, according to online private equity marketplace Palico. Such figures contributed the firm being judged the best performing private equity firm in the world in January 2017 by Oliver Gottschalg at French business school HEC alongside Dow Jones.

While fees remain an issue of contention, it’s clear LPs will continue to stick with well-performing managers. One LP who declined to be named told PEI that Waterland could even charge more than the standard 20 percent carried interest – a sign some LPs are happy to bear the burden so long as the returns speak for themselves.

“If any firm deserves to go to 25 percent [in carry], it’s Waterland.”