When Cognetas abruptly parted company with managing partner Nigel McConnell in June, it raised eyebrows across the industry. McConnell had been instrumental in the spin-out from Electra Investment Trust in 2005. Even now, four months later, the reasons behind his departure remain a mystery, at least officially; both sides are still refusing to comment over and above the time-honoured excuse of “strategic differences”.
Before McConnell left, Cognetas had been just days away from securing an extension to the investment period of the €1.25 billion Cognetas Fund II, according to a source close to the process. But his exit – which also triggered a key-man clause barring Cognetas from further investment activity for 60 days – seemingly put paid to that. Instead, new head Patrick Eisenchteter allowed the investment period to expire, leaving the fund with €200 million in un-deployed capital.
In September, Eisenchteter set out the firm’s new strategy: Cognetas would close its offices in London and Frankfurt altogether, focus its efforts on France and Italy, and concentrate on improving and then exiting its existing investments.
This is clearly a gamble. €200 million – one sixth of Fund II’s overall capital – is a lot to spend on bolt-on acquisitions as opposed to new investments; it seems unlikely this was part of the original business plans for the seven remaining portfolio companies. And although Eisenchteter insists the firm’s LPs were supportive of the decision to focus on the “exciting markets” of France and Italy, the former remains highly competitive, while the latter’s macroeconomic problems have been well-attested.
The closure of the Frankfurt and London offices has also meant a loss of investment talent, including London partners Charles St. John and Jonathan Musselwhite. “We have had to take some difficult decisions,” Eisenchteter admitted. “We have 12 people in London. A number of these will stay on for the foreseeable future in connection with the administration of the firm. The rest will be leaving.”
All of which begs the question: is there a way back from here? Will Cognetas ever be able to raise a new fund? Eisenchteter says so. “In good time, yes,” he told Private Equity International.
Others are not so sure. Cognetas has already fought off one approach, reportedly from Charterhouse Capital Partners, which is understood to have tabled an offer for the remaining seven companies in the Fund II portfolio. Secondaries specialists like Coller Capital, Partners Group and Vision Capital are also likely to be sniffing around.
And no wonder. After so many high-profile senior departures and a major shift in strategy, some are asking whether the firm can still viably operate under the Cognetas banner. Rebranding would at least help to distance the management team from the negative sentiment.
On the other hand, a secondary sale is unlikely to deliver the same level of return as seven successful exits. And if these deals do prove to be hugely successful under the new leadership, it might even be able to persuade investors to stump up for Fund III.
So for now, the situation remains on a knife-edge. “There have been developments since the strategy announcement,” one investor in Cognetas’s funds told PEI, declining to elaborate. “GPs never really go away, they just change form.” In other words: watch this space…