It may constitute only a small fraction of the European private equity market in terms of deals done and funds raised, but Denmark has punched above its weight with a powerful blow to an asset class increasingly up against the regulatory ropes.
At the beginning of June, the Danish Parliament (Folketing) passed new legislation reducing the interest deductibility on loans used to finance takeovers. While the legislation applies to all Danish companies, it is expected to hit private equity firms undertaking leveraged buyouts particularly hard.
“Even though this is a general change, it was presented by the press and government as an attempt to counter very aggressive private equity tax planning,” says Arne Mollin Ottosen, a tax partner at Copenhagen-based law firm Kromann Reumert.
Market sources say the roots of the new law – which introduces an interest deductibility ‘ceiling’ based on the tax value of a company's assets – can be traced back to the buyout of Danish telecom operator TDC in March 2006 by Apax Partners, Blackstone Group, KKR, Permira and Providence Equity Partners. At €10 billion, TDC was Europe's largest private equity deal at the time.
The highly leveraged deal stoked controversy, as TDC had been steadily reducing its debt burden in the years leading up to the deal. The takeover, which featured a large junk bond issue, led to an instant downgrade of TDC's debt by rating agency Moody's and was labelled a “scandal” by former Danish premier Poul Nyrup Rasmussen, a member of the Socialist Group in the European Parliament.
Market sources say the Social Democrat-led coalition that governs Denmark jumped on the bandwagon when it realised that Rasmussen's criticism of “predator funds” had tapped into popular feeling. This does, however, place the nominally pro-business grouping in a difficult position. “The government claims only 1,000 companies will be hit by the new legislation and that [because of falling company tax rates] everyone else will benefit,” says Ottosen. “The problem is that these companies employ the majority of the Danish workforce.”
For private equity pros in European markets where the issue of interest deductibility is currently being debated, such as the UK and Germany, the Danish precedent will not be welcomed.
GREENPARK RIDES SECONDARIES WAVE…
European secondaries firm Greenpark Capital has closed its third and biggest fund on €730 million ($983 million), far exceeding its original target of €500 million. The fund will invest in interests in buyout, growth capital, mezzanine and other funds, and portfolios of direct investments in private equity assets. Marleen Groen, chief executive at Greenpark, said: “Investors have become increasingly receptive to secondaries as a portfolio management tool in the last few years, at the same time as they've been increasing allocations to the primary market.” San Francisco-based Denning & Company helped raise the fund.
… AND SO DOES AXA
The private equity business of French insurer AXA, has raised $2.9 billion (€2.2 billion) for a new secondaries pool. The fund was raised in just four months and exceeded a target of $2.2 billion. According to AXA Private Equity, the fund is already 10 percent invested in two deals – a €134 million acquisition of two stakes in Italian mid-market private equity funds Sofipa Equity fund and Sofipa Equity Fund II and a $132.5 million commitment to an unnamed US buyout firm. AXA Private Equity now has more than €11 billion under management.
European secondaries firms have been active on the fundraising front recently. Coller Capital closed a $4.5 billion fund in April, the biggest secondaries fund ever raised.
SGAM RAISES €156M FOR CEE FUND
SGAM Alternative Investments has closed its fourth eastern European fund on €156 million ($211 million). Parent company Société Générale and the European Bank for Reconstruction and Development were the biggest investors. The fund will invest in minority stakes and buyouts of mid-market companies in central and eastern Europe. Bill Watson, chief executive officer for Eastern European private equity at SGAM, said: “Our mid-market focus makes us a different type of investor from other firms in the region like BC Partners and Warburg Pincus, which have far larger funds. Our aim is the expansion business so we can sell our companies on to the BC Partners of the world.”
INDIGO RAISES €550M WITH EASE
The credit market boom continues, and European mezzanine firm Indigo Capital is one of the many beneficiaries. In June, the firm closed its fifth fund on €550 million ($743 million) while still investing its previous fund. Kevin Murphy, a founding director of Indigo, said: “We could have raised much more than €550 million but we decided to be consistent with our previous funds and stay in the mid-market.” According to Indigo, the fundraising process took just four months in which commitments were won from 25 investors – about 70 percent of which were existing investors who re-upped from the previous fund.
ALFA CLOSES RUSSIAN BUYOUT FUND
Moscow-based Alfa Capital Partners has raised $200 million (€149 million) for a private equity fund investing in Russia and Ukraine. The firm, which is the private equity and real estate business of Russia's Alfa Bank, has been investing in infrastructure and real estate since its inception in 2003. The fund, which is led by chief executive Richard Sobel, won commitments from 12 investors, some US and some European. It has completed two deals to date, one of which has not yet been disclosed while the other is high-end Russian fitness club chain World Class which it bought in April 2006. Earlier in his career, Sobel worked at Baring Asset Management alongside Michael Calvey, managing partner of current Russian market leader Baring Vostok Capital Partners.
TERRA FIRMA CLOSES €5.4 BILLION FUND
UK buyout firm Terra Firma has closed its third fund on €5.4 billion ($7.3 billion) – more than double the size of its previous fund at €2.1 billion. The fund attracted investors including US bank Citi and European fund of funds AlpInvest Partners. The Terra Firma investment team, which is led by Guy Hands, committed €200 million. Terra Firma recently had a £11.1 billion bid for UK health and beauty chain Alliance Boots trumped by buyout rival KKR.
KROKUS RAISES €100M FOR POLISH FUND
Warsaw-based Krokus Private Equity has closed its latest fund on €100 million ($134 million), exceeding its target of €75 million. The fund, Nova Polonia Natexis II Private Equity Fund, will target expansion and buyout opportunities in Poland's mid-market. It will invest between €3 million and €10 million of equity in companies with an enterprise value of between €3 million and €30 million. Witold Radwanski, chief executive of Krokus, said: “Krokus is deliberately positioned at the smaller end of the Polish private equity market as there is less competition for deals and valuations remain reasonable.”