The unlimited partner

The offer was a difficult one to refuse. Englefield Capital, a new private equity firm led by former Warburg Pincus partner Dominic Shorthouse, had been on the road for several months with its debut fund. The market is seldom kind to first-time fund teams, but 2002 was particularly tough.

London-based Englefield launched marketing for The Englefield Fund in May of that year with a target of €450 million ($560 million) and was jumping through the hoops required of a firm in its situation – relying on a placement agent (Merrill Lynch), making the rounds of institutional investors, keeping abreast of investment committee approval processes. Then the firm was approached by Bregal Investments with The Offer – how about dispensing with the fundraising dog-and-pony show and agreeing to a €650 million commitment from Bregal?

Englefield said yes, and in so doing put not one, but two major new private equity groups on the map.

At the very least, Bregal's offer fast-forwarded Englefield's activities directly to the deal-doing stage. “We saw this was a terrific team, but it would have taken probably 12 to 18 months to raise their fund, given the environment,” says Yves de Balmann, the firm's New York-based co-chairman. “We saved them 12 to 18 months.”

More importantly, the partnership has created an unusually close relationship between general partner and limited partner, though the term “limited” here is applied loosely. Some in the industry see Bregal's approach to private equity investing to be among the most sophisticated – the firm is using its considerable heft to its advantage by forging relationships in which it plays a significant role and enjoys advantages not afforded to most LPs.

More than most, the Brenninkmeijers can certainly appreciate the concept of long-term business growth. The family empire began in the 1800s in The Netherlands as a linen and textiles operation. Today, the family is best known for its vast European chain of C&A retail clothing stores, which reportedly generates annual revenues of roughly €5 billion.

The family holding company, Cofra, is based in Switzerland. It operates the retailing business, a real estate portfolio called Redavco and a retail-focused financial services arm. In 2001, the family decided to build out a more significant private equity programme. Cofra appointed Louis Brenninkmeijer to the post, who then contacted de Balmann about co-heading the new group.

De Balmann, a dual citizen of France and the US, has spent the bulk of his professional life in the US financial services sector. He first came to America on a prestigious Fulbright scholarship in 1969 to receive a Master of Science in operations research from California's Stanford University. After senior positions at Citibank and Shearson Lehman Hutton in derivatives and capital markets, respectively, de Balmann landed at Bankers Trust as vice chairman in charge of the investment bank. After the 1999 merger with Deutsche Bank, de Balmann became global head of investment banking.

But by 2001, says de Balmann, he had “had enough” of the sell-side lifestyle. “I was literally here [New York] one week and in Europe the next week,” he remembers. “When you have 9,000 employees, you end up getting a little bit distant from the deals.”

An introduction to Louis Brenninkmeijer, based in Brussels, gave de Balmann the opportunity to get quite close to deals again.

De Balmann says the first several months at Bregal were spent formulating an approach to private equity that best fit the strategic objectives of Cofra. What the holding company did not need more of was cash flow – the family's sprawling retail operation, as well as its real estate holdings, already provided that in spades.

The senior management of Cofra was also reluctant to spread around its €2.5 billion – the amount earmarked for private equity – solely in passive LP interests.

“Much of what has been successful in the past for Cofra has been the ability to control situations they are in,” says de Balmann. “They don't mind being in minority situations, but they like control situations. That is not a trivial thing.”

As a first major step, Bregal decided to find a GP team that would have the ability to invest an enormous chunk of Cofra money through something more refined than a standard LP-GP relationship. Although the Englefield fund closed in May 2003 with commitments from a number of other institutions, including AXA Private Equity, the Dutch Shell Pension Fund and Delta Lloyd, Bregal takes up the lion's share of the €700 million vehicle.

As such, it enjoys a broadened role as a partner. Although de Balmann declines to discuss specifics of its relationship with Englefield, he says: “We decided that if we felt comfortable with a team, we'd go for a larger amount [of commitment] than other people typically would. But we decided to be certain that we were right there with them, so that if things changed, we could impact the course of events as well as they can. You're one step removed when you invest as a limited in funds.”

Adds de Balmann: “Think of it truly as a partnership. We talk to Englefield all the time.”

Bregal is not alone in feeling dissatisfied with standard LP-GP terms. Canada's Teachers' Merchant Bank, the private equity arm of the Ontario Teachers' Pension Plan, was established specifically to invest the pension's capital directly in deals, in addition to doing so passively through third-party funds. New York-based buyout giant Kohlberg Kravis Roberts has publicly questioned the practice among institutional investors of doling out commitments to multiple managers. Why not invest more with fewer managers, they ask? In fact, with this model of investing in mind, KKR recently offered to sell two major backers – the state pensions of Oregon and Washington – a slice of the firm's management company, a proposal the pensions rejected.

Cofra, for its part, had already tested the waters with the dominant-LP approach through two previous, but smaller, fund relationships. The family holding company has a €200 million commitment to Egeria, an Amsterdam-based middle-market firm, and a C$200 million (€119 million; $149 million) commitment to Birchill Resources, a Canadian oil and gas fund manager.

According to a source, an early version of The Offer was for Englefield to manage even more capital for Bregal in both Europe and North America. Englefield demurred, arguing that its true expertise was in Europe.

Bregal found its US partner in December with its announcement that the firm would commit approximately $600 million to a fund managed by Centre Partners, a New York middle-market buyout specialist. Unlike Englefield, Centre Partners, led by Lester Pollack, has been in business for a long time – the firm was founded in 1986.

Again, de Balmann declines to describe terms of Bregal's relationship with Centre Partners, other than to say that his firm has a “direct window” onto the activities of the buyout firm.

Bregal also invests in funds as a plain-vanilla LP, but de Balmann describes these relationships as commitments to groups that have expertise in strategies well outside those of the professionals at Bregal.

The firm is currently exploring commitments in the distressed space, and de Balmann says he has taken an interest in funds that seek to acquire pharmaceutical royalties. “We reserve money for when we find things that are totally unique,” says de Balmann.

The firm also recently committed to Activa Capital, a middle-market buyout firm focused on the French market.

Bregal was also a participant in the spin-out of MidOcean Partners, the former direct investment arm of Deutsche Bank, along with a roster of major institutional investors led by Dutch pension group NIB Capital Partners. De Balmann says this was an opportunity to participate in a unique secondary transaction with a “motivated seller and an attractive price.”

De Balmann says that he is extremely pleased with the two “anchor” investments his firm has made in Englefield and Centre Partners – commitments that came after the teams were “thoroughly investigated.” De Balmann himself is also pleased to be participating in private equity, an industry where he is in an up-close position to “look at value, look at investments.”

Bregal's approach to structuring relationships with general partners in a way that gives more value to the capital provider is one that other large investors serious about this asset class will likely seek to emulate.