Putting in the skin

Alignment of interest has always been a private equity selling point. During the financial crisis and its aftermath – with performance suffering across many portfolios – limited partners have paid more attention to the way managers are rewarded and how to make their incentives genuinely foster prudent and successful investment.

Investors are particularly keen to ensure that GPs feel their downside pain in the case of investments gone bad, as well as sharing in the upside of any successes. In other words, they want to see individuals with a substantial amount of their own wealth at stake, their own “skin in the game”.

For Axcel Partners, a Danish mid-market firm, a hugely successful investment from its third fund prompted it to increase the manager commitment to its latest vehicle to 6 percent from 1 percent.

The GP commitment to a fund does vary, but will normally sit in the 1 percent to 2.5 percent region depending on the size of fund and the liquid net worth of the partners.

“Six percent is a very high number for an independent fund and will certainly make LPs sit up and take note,” says Bruce Chapman, a London-based placement agent with Threadmark, who elaborates that it would be very difficult for any obviously wealthy manager to raise a fund in this environment without committing a substantial amount.

LPs are responding well to Axcel’s offering. The firm is understood to have raised around DKK3 billion (€402 million; $530 million) so far for its fourth fund, equalling its target. Sources say the firm is likely to hold a final close in the first quarter of 2011 with another DKK500 million committed.

Axcel declined to comment on the fundraising process.

The partial exit which spurred the increased GP commitment was Axcel’s investment in Danish jewellery retailer Pandora, which has generated venture-like returns for the firm and its limited partners. The portfolio company, known for its charm bracelets, had an initial public offering in October, raising $1.8 billion. Since then, Pandora’s share price has steadily increased from DKK225 per share when it was listed to around DKK353 per share at press time. The increase in share price means the Pandora investment currently represents a return of around 30x for Axcel’s third fund, which still owns around 32 percent of the retailer.

The phenomenal success of the Pandora exit has made the individuals at Axcel, led by managing partner Christian Frigast, a considerable amount of money. As a result of the partners increasing their individual net worth, the team has increased its own commitment to Fund IV.

If the firm completes the fundraising process as expected, it will become one of only a very few firms to brave a difficult fundraising environment and raise its largest-ever fund. In 2006 the firm closed Axcel Partners III on DKK3 billion.