ANNEX FUNDS A partner less limited

Southern European buy-and-build specialist Investindustrial closed a €100 million annex fund in October – with commitments largely from existing investors – to fund the expansion of existing assets within its portfolio.

The annex fund will be used to execute buy-and-build acquisitions for companies owned by Investindustrial's €500 million 2005 fund. The firm has already identified a number of “attractive targets” for such investments during 2009 and 2010, the firm said in a statement.

The fund terms are understood to grant LPs greater transparency and power as regards the fund's investment decisions. While the precise details remain unclear, one source said the fund is structured so that GPs and LPs are “working together as partners”, giving LPs the power to vote against transactions, as opposed to the typical GP-LP relationship that entrusts GPs to make all investment decisions. The annex also has a “less burdensome” fee structure than traditional funds, said one source.

Annex funds are not always viewed favourably by limited partners, as they are often raised to help support struggling portfolio companies (Investindustrial's fund is understood not to belong to this category).

Timothy Spangler, a London-based partner at law firm Kaye Scholer, says that there is no norm for annex fund terms and conditions, because each vehicle is created to address particular situations. “They are a new beast and a feature of this point of the cycle,” he says. “The variation in terms is much wider than you would get with traditional private equity funds.”

Judging by comments from Wim Borgdorff, managing partner at one of Europe's largest LPs, AlpInvest Partners, (see page 42) the terms for annex funds will more often than not be skewed in favour of the limited partners. “We definitely do not support structures in which managers simply want to add a little more commitment to the pool and move on,” he says. “We push hard for new terms for the annex capital.”