Permira offer to LPs may shrink fund

Investors in Permira’s Fund IV have been given the option to limit their capital contribution to 60% of the amount they originally committed to the €11.1bn fund.

Global buyout firm Permira has thrown a lifeline to those limited partners in its €11.1 billion Fund IV who may be struggling with over-weighted private equity programmes and liquidity problems. Under a proposal sent today to all limited partners in the fund, the firm is allowing them to cap their original commitment to the fund at 60 percent.

The firm has spoken to many investors in the fund and is expecting only a limited take-up of the offer, a Permira spokesman said. “The point of the proposal is to balance the interests of those investors who want to continue with their original exposure to the fund, and those who feel they must adjust their commitments,” he said.

Under the terms of the proposal, the maximum reduction of the fund size would be to €9.5 billion from €11.1 billion.    

Permira’s decision to take this unusual measure suggests that some LPs in the fund are under huge pressure to manage their cash flows through the financial crisis.

Talk of limited partners struggling to service their commitments to private equity funds has been widespread in recent weeks. Some large investors in private equity, like the California Public Employees’ Retirement System, which committed $302.5 million to Permira IV, have admitted to discussing the timing of capital calls with their GPs.

However, no other manager of a private equity mega-fund has yet announced any moves similar to Permira’s. The Carlyle Group has written to investors urging them not to default on their commitments.

For limited partners in the Permira fund, taking up the offer will be costly. They will have to accept a 25 percent reduction in distribution entitlements from the fund. They will also have to continue to pay management fees based on their original commitment.

The fund – which when it closed in 2006 was the world’s largest buyout fund ever raised – has already called 52 percent of LP commitments, according to a statement released by SVG Capital, the London-listed fund of funds that is Permira’s largest investor.

SVG has said publicly LPs are challenged by a lack of liquidity when capital calls occur with few incoming distributions to balance them.

SVG said today its board is reviewing the Permira proposal. Its share price rose some 5.5 percent upon news of the Permira proposal, and was trading at 195p per share at press time.

Additional reporting by Amanda Janis