They were the favourite childhood toys of German males now over 30, many of whomare still keeping a set in their basements – miniature trains made by Mörklin, a once proud, family-owned Mittelstand company with a 150-year history and more than 1,000 employees.
Under private equity ownership since 2006, Mörklin filed for bankruptcy protection in February after its lenders refused to extend a €50 million loan. Owing to the company's iconic status, its collapse is big news in Germany, and commentators are critical of private equity owners Kingsbridge Capital and Goldman Sachs.
Never mind thatMörklin was already close to insolvency when Kingsbridge and Goldman first invested in the business – the popularity of its products is not what it once was. But now that efforts to restore the company's long-term viability have ostensibly failed, some blame Kingsbridge, a London-based private equity fund affiliated with Vienna-based alternative investment firm Hardt Group. This is despite a source close to Kingsbridge saying it was keen to continue funding the business had its credit line not been pulled.
In addition to high management turnover, part of the controversy is that in the three years since the takeover, according to media reports, Mörklin was charged over €40 million in advisory fees – including management fees payable to Kingsbridge. In 2007, when €13million in fees were allegedly charged, the company had revenues of €126 million.
The same Kingsbridge source, however, disputed the claims in conversation with PEI- claiming that only €4.5million including interest had been charged toMörklin in advisory fees over the three years.
Inmid-February, according to influential newsmagazineDer Spiegel, a state prosecutor was considering an investigation into the legality of the payments. Also in mid-February, business daily Financial Times Deutschland published an article about Kingsbridge's ownership of the company entitled “Mörklin – the great train robbery”.
The episode highlights a broader concern for financial sponsors active in Germany. Mörklin is not the only private equity-backed company to have failed in the country recently. Carlyle-owned automotive supplier Edscha went bust in early February; Stankiewicz, an auto supplier owned by Dutch sponsor Gilde, has also filed for insolvency protection; TDM Friction, which was owned by Montagu Private Equity, went under last December
As the economic crisis intensifies, other private equity-owned bankruptcies may follow. When they happen, some headline writers at German newspapers will be quick to use the word “locusts” to denounce sponsors' ownership style. For the industry as a whole, the reputational risk in Germany is as acute as it has ever been. Firms with assets at risk must be alive to this – and ready to defend their record publicly when the need arises.
COLLER TAKES SLICE OF SVG
Coller Capital has built a 24 percent stake in SVG Capital, the listed fund of funds which invests primarily in funds managed by buyout house Permira. Coller has picked up 50 million shares at £1 each in SVG's recent 70 million share rights issue. SVG, which is listed on the London Stock Exchange, revealed in December that it would seek to raise fresh capital as part of a number of measures to shore up its balance sheet and ensure it can meet future commitments.
BRIDGEPOINT SEALS FINNISH DEAL
UK-headquartered private equity firm Bridgepoint has sealed the first deal from its €4.8 billion fourth fund with the €312 million take-private of Finnish healthcare business Terveystalo Healthcare. The tender offer of €2 per share in cash, which represented a 203 percent premium to the company's closing price on January 16, was accepted by holders of 95.7 percent of the company's share capital.
CARLYLE AND TPG PROP UP UK PORTFOLIOS
Washington DC-based The Carlyle Group plans to boost beleaguered portfolio company IMO Carwash with £25 million (€25 million; $35 million) in equity if creditors will accept write-downs on its debt. The UK firm breached its banking covenants on a £355 million loan and has negotiated a standstill arrangement with its debtors. A decision has not yet been reached on the agreement and talks are ongoing, according to sources. Fellow US private equity firm TPG has also moved to reduce a UK portfolio company's debt, proposing a €60 million cash injection into UK chemicals company Vita in exchange for a reduction in its debt claim from €633 million to just €100 million.
CANDOVER TO DOWNSIZE FUND
UK buyout house Candover is to shrink the size of its 2008 fund, which has raised €3 billion of its initial €5 billion target. Candover Investments, the London-listed entity that owns Candover and makes majority commitments to its funds, said its €1 billion commitment would be reduced “significantly”. As well as reducing the fund's size, Candover is in talks with its limited partners to revise the fund's investment strategy “in light of both a smaller fund and the significant changes in the global economy in the last six months”, said the firm.
AXA SETS UP RENEWABLES JOINT VENTURE
Paris-based AXA Private Equity is pushing further into Italian renewable energy investments, having established a joint venture with Ravennes, Italybased industrial companyTozziGroup. The firms have set up a holding company called TRE& Partners, of which AXA holds a 45 percent stake and Tozzi holds the majority 55 percent stake, which will invest in wind farms, hydroelectric plants and solar projects.
ACG FUND OF FUNDS LAUNCHED
ACG Private Equity, formerly known as Altium Capital Gestion, has begun marketing its fifth European fund of funds. The Paris-headquartered firm aims to raise between €250 million and €300 million for ACG Europe V, one-third of which will be allocated to special situations funds. The balance of the fund's capital will be divided between Central and Eastern European and growth capital funds.
SILVERFLEET ADDS TO MUNICH TEAM
European mid-market private equity firm Silverfleet Capital has hired Klaus Maurer, bringing to six the number of investment professionals on its Munich-based team. Maurer was previously an analyst in Terra Firma's Frankfurt office, prior to which he worked in leveraged finance at Société General and BHF-Bank.
VEDDER GETS ACTIVE IN PRIVATE EQUITY
Clemens Vedder, the investor whose activist shareholder group Cobra made a killing on a stake in Germany's Commerzbank in 2000, is marketing his first private equity vehicle. Whitesmith Private Equity Investors, for which Vedder hopes to raise €1 billion, will target retail and financial services businesses in German-speaking Europe. Vedder launched his alternative investment firm, Cayman Islands-based Goldsmith Capital Partners, in 2007. The firm's first vehicle, an activist shareholder hedge fund named Blacksmith, was launched last year.
BARCLAYS LOAN BOOK WEIGHTED TO TWO DEALS
The £10.4 billion (€11.9 billion; $15.5 billion) leveraged loan book of Barclays Bank, the UK's secondlargest bank, is dominated by two private equity deals, both done at the height of the credit bubble. Loans connected to the buyout of Alliance Boots and the AA-Saga merger account for 47 percent of Barclays' leveraged finance exposure. Barclays' European leveraged loan “portfolio is well spread by industry and region, however, 47 percent of the overall portfolio now relates to Alliance Boots and AA Saga”, Robert Le Blanc, Barclays group risk director, said in the banking group's annual results presentation.
UNIGESTION IN DOUBLE LAUNCH
European hedge fund and private equity fund of funds manager Unigestion has committed to raising two new private equity funds in the first half of 2009, hoping to capitalise on bargains in the secondary and global sustainability sectors. Unigestion Secondary Opportunity Fund II will launch in the first quarter of this year, targeting assets from distressed and over-exposed private equity sellers in the small to mid-market sphere, hoping to exploit recent discounts of 50 percent or more on portfolio valuations. Unigestion Environmental Sustainability Fund of Funds will launch in the second quarter of this year, targeting growth capital, infrastructure and venture capital investment in alternative energies, efficient use of resources, and pollution control.
SHIPPING FUND SETS SAIL FOR $400M
M2M, a specialist shipping investment firm based in London and Athens, is raising a $400 million private equity fund to take advantage of what it describes as “the most attractive vessel acquisition environment in a generation”. M2M was established in 2005 and currently manages more than $600 million in assets across two hedge funds.
HANDS TO BUY HIS OWN LPS' INTERESTS
Terra Firma, the UK buyout house run by Guy Hands, has bought three limited partners out of its 2007 fund at “a small premium” to the face value, according to a source familiar with the matter. The three fund interests, which between them are liable for €25 million in uncalled commitments, were bought by the fund's management company. Guy Hands, who was already one of the four largest investors in the fund, had been in discussion with each of its 170 LPs to ask if they have the liquidity to meet future capital calls. The sellers comprised two large institutions and one family-owned group.