Palamon takes novel tack after fundraising struggle

The firm has closed a €210 million 'Auxiliary Fund' with just a two-year investment period, after struggling to sell the idea of European growth.

European growth investor Palamon Capital Partners has called a halt to its fundraising efforts, closing a new 'Auxiliary Fund' on €210 million – €460 million less than it raised for its previous vehicle.

The Auxiliary Fund will have an investment period of just two years rather than the standard five to seven – a novel short-term approach adopted after the firm struggled to persuade investors of Europe’s growth potential.

“The amount of money going into growth companies in Europe right now is tiny,” Louis Elson, managing partner at Palamon, told Private Equity International. “Our last fund had over €650 million, and if we were to try to raise that amount again now, it would account for nearly 50 percent of all the capital being raised in Europe. So you have to skin the cat a different way.”

Palamon blamed concerns over the fate of the euro and a perceived lack of growth opportunities on the continent, particularly among American investors. “When we say we’re investing in growth companies in Europe, [investors] laugh and say it’s an oxymoron,” said Elson. “But Europe is enormous, and pockets of growth are springing up.”

Palamon will continue to make equity investments of between €15 million and €80 million in mid-market growth services businesses across Europe. It said the novel fund structure would allow it to continue to invest at the same rate, rather than having to move to an alternative investment strategy – although if that is the case, it also require the firm to return to the fundraising market in two years.

“GPs tend to adjust their strategy to fit the capital of the day,” said Elson. “But we’re still committed to investing €100 million a year. We just decided to structure the fund so it matches market requirements, as opposed to blindly following the standardised fund system.”

Palamon’s Auxiliary Fund received commitments from over 20 investors, including fund of funds Alpinvest and Adams Street Partners, the corporate pension plan of Honeywell, family office Quilvest and the endowment of Spelman College.

Palamon is hardly the only Europe-focused firm to have struggled to raise funds in the current operating environment. In September, Swedish private equity firm Proton Equity Partners abandoned attempts to raise SEK 2bn ($311 million)  for its debut buyout fund to target investments in Sweden, after failing to attract sufficient investment.

However, Elson remains confident that conditions will improve. “Within 18 months our US investors will have a very different view of Europe compared with emerging markets,” he insisted. “Capital ebbs and flows, and it will come back very strongly. People will want access to European opportunities, and we are one of only a handful of groups that control the way in. Sometimes you have to stay paddling on your surfboard – the wave will come.”