General partners prefer to define it as “optionality”: that ability, in times of market volatility, to tailor their approaches to best suit the circumstances of the day. Those of a more critical persuasion would see it instead as “strategic drift”. The bad news would appear to be that, according to a new survey, strategic drift is a major preoccupation of limited partners. And they're deeply worried about it.
The latest Global Private Equity Barometer, a snapshot of LP opinion published by London-based secondaries specialist Coller Capital, found that 84 percent of investors based in North America considered strategic drift as a risk to their returns. Overall, three-quarters of those surveyed said they were worried about private equity fund managers straying into strategies or geographies where they lack expertise.
Pressure from LPs not to veer beyond strategies stated in fund documentation might be expected to place some larger funds in particular in something of a dilemma. After all, given the banks' unwillingness to underwrite hefty chunks of debt finance in the wake of the credit crunch, they may claim that there is little else they can do other than sit on their hands and wait for conditions to improve or, alternatively, fork out larger amounts of equity per deal. Given the implications for management fee wastage in the former case and returns pressure in the latter, neither of these solutions is necessarily attractive.
Ultimately though, are we now at the point where investors are about to turn their backs on the asset class? Not a bit of it. The survey also reveals that 38 percent of LPs are planning to increase their allocations to private equity over the next year, while just 3 percent have a reduction in mind (see chart below).
DANSKE HOLDS FIRST CLOSE FOR MID-MARKET BUYOUTS
Danske Private Equity, a Copenhagen-based fund of funds manager, has held a first closing of Danske Private Equity Partners IV on E521 million ($808 million) with capital raised from Nordic institutions. A number of other investors are in various stages of due diligence, and further closings are expected to push the amount raised beyond the E600 million target, the firm said. Danske intends to pursue a strategy similar to that followed in predecessor funds. It will invest in privately held small and mid-size companies, through a portfolio of leading mid-market buyout funds in North America and Western Europe. Roughly half the capital will be committed to each territory. In addition, Danske PEP IV will pursue secondary opportunities and will seek to co-invest. Predecessor funds, Danske PEP I and Danske PEP II, which both raised E550 million, are fully committed across 15 funds each. The firm said it is enjoying substantial distributions and strong performance in underlying portfolio companies.
EU AND STATE BACKING FOR PORTUGUESE VC PUSH
The European Investment Fund (EIF), the Portuguese Government and Portuguese financial institutions are jointly launching a E111 million ($175 million) fund of funds and co-investment programme, The Portugal Venture Capital Initiative. The aim of the initiative is to speed up the development of the private equity and venture capital industries in Portugal in order to support small and medium sized enterprises (SMEs). The fund will support local fund managers as well as seek investment from regional and international players. EIF, a body focused on financing SMEs throughout the EU, will serve as advisor to the fund. It has invested E4.4 billion in approximately 280 private equity and venture capital funds and has provided E11.4 billion in guarantees to those financing SMEs. Investors in addition to EIF and the Portuguese Government are: Portuguese foundation the Calouste Gulbenkian Foundation, and financial institutions Banco BPI, Banco Espirito Santo, Millennium bcp, Caixa Geral de Depositos, Barclays Bank, Montepio and Banif Banco Santander Totta.
ELECTRA BACK IN INVESTMENT MODE
The UK's Electra Partners has attracted commitments of £100 million (E125 million; $198 million) for a fund that will invest primarily in buyouts but also other types of investment such as mezzanine and real estate. With leverage, the new vehicle will have £1 billion to invest mainly in the UK and Western Europe. As well as giving Electra Partners a fresh well of capital, the move is also a significant step for its principal client, the quoted investment trust, Electra Private Equity. The company fought off a hostile takeover bid by 3i in 1999 and subsequently embarked on a successful five-year liquidation process, but then, following a 2006 strategic review, decided to return to fully blown private equity investments. To do so, it removed a rule that it could only re-invest up to a third of proceeds from realisations and appointed Electra Partners as investment manager. The new fund will seek mid-market buyouts, mezzanine and real estate deals typically ranging between £20 million to £70 million with an enterprise value up to £300 million.
EDMOND DE ROTHSCHILD CLOSES €150M BIOTECH FUND
Paris-based Edmond de Rothschild Investment Partners has raised E150 million ($236 million) for a new venture capital fund focused on young European drug companies. BioDiscovery 3 has held a final closing but the firm is keeping a 10 percent greenshoe option open to additional investors. Investments will be made both in therapeutic drug development companies and a combination of medical technology and molecular diagnostic companies. Though the fund is focused mainly on Europe, it can also invest elsewhere. This is the third life science fund for Edmond de Rothschild Investment Partners, with many investors returning from previous funds, such as La Compagnie Financière Edmond de Rothschild, La Caisse des Dép^ts and Amgen. The firm has invested in about 30 life science companies over the past eight years, and has now raised a total of E300 million for life sciences investment.
AXA PE MORE THAN TRIPLES FIREPOWER
Paris-based AXA Private Equity has raised E1.6 billion ($2.4 billion) for its fourth buyout fund, a substantial size increase from its predecessor fund which closed on E500 million in 2005. Dominique Senequier, chief executive of the insurance company's private equity group, said fund IV “is such a size that we can go above the previous scope and we can reach companies with up to E2 billion” market capitalisations. Unique from its predecessor, Fund IV will – in addition to Germany and France – invest in Italy, where AXA opened an office in 2006. In last the four years, Senequier said, AXA invested roughly E400 million in Italian companies across its varying private equity strategies, a small fraction of the $22 billion the firm manages. Raised without a placement agent in roughly eight months, Fund IV garnered commitments from approximately 95 percent of existing investors, which include CDC Capital, the buyout arm of Canadian pension Caisse de Depot et Placement du Quebec. Senequier expects the fund will be deployed within approximately three years, and notes that current credit market conditions hampering highly leveraged deals are not affecting the market segment AXA targets.
ATP PEP HALFWAY THROUGH FUND, PREPARES ANOTHER
ATP Private Equity Partners has invested around half its E1.5 billion ($2.4 billion) fund committed in the final quarter of last year by ATP, the Danish pension fund, which is the sole investor in its funds. The firm intends to follow this with a fresh fund, expected also to raise E1.5 billion. The firm will almost certainly not be increasing the capital it raises for the next fund, as the pension fund believes E1.5 billion is a manageable amount to commit. But the possibility of increasing the fund size has been discussed, said partner Susanne Forsingdal. The firm has continued its restructuring in the wake of the departure of Jens Bisgaard Frantzen, the former chief executive and managing partner of ATP PEP, who left last year to head up Private Advisors' European team. ATP is now headed jointly by Forsingdal, Torben Vangstrup and Klaus Rühne. This week it promoted Nils Johannessen to director and Noman Mushtaq, Jesper Voss Hansen as well as Christian Brønden Petersen to vice president roles.