Terra Firma: Mixing it up

In February, it emerged that Terra Firma Capital Partners has €1 billion available for new investments. The capital is a mix of Terra Firma’s own funds and third-party money, which can be deployed opportunistically, Guy Hands, chief investment officer and chairman of Terra Firma, tells PEI.

“This is seed capital which we can use for individual deals, to underwrite deals or co-invest with investors, or to seed a fund,” he said, adding that Terra Firma will not be charging management fees, until the money gets deployed: “That money is discretionary. If we use [it] appropriately, it can last us indefinitely [as we can] recycle it over time.” Asset-backed businesses that are in need of change will remain the firm’s strategic sweet-spot.

Hands says being able to invest money that doesn’t come from a conventional fund structure has its advantages. He says Terra Firma will still raise funds in the future, but he also points out that some investors are not thrilled about the model. “A traditional private equity firm raises money, puts as little money into each fund as possible and then invests it as quickly as possible. What investors have said is that they don’t want the average of me, but the best of me. So a lot of sovereign wealth funds have said: come to us with your best ideas, when you are willing to put up at least 5 percent of the money and then we will either seed the fund or we will do it as a direct deal depending on what it is.”

Meanwhile the firm’s plans for a renewable energy fund are still evolving, and Hands points to market dynamics to explain why. Originally marketing the fund with a €2 billion target, last year Terra Firma came close to holding a first close when it was working on a commitment from Canadian pension fund PSP Investments. PSP proposed to invest €1 billion, with the rest being raised from third parties. PSP also asked Terra Firma to put in a GP commitment of 7.5 percent. And before PSP would commit, they required Terra Firma to do a deal of at least €400 million.

“The problem with that was that at the time we went out to raise the money, the market had moved. We wouldn’t say that we wouldn’t do a large deal and end up doing a €2 billion fund, but we just don’t see deals out there today in the large space that we would put 7.5 percent up against, because I think we can do better things with the money,” says Hands.

Following that decision, Stefan Thiele, a managing director in Terra Firma’s renewable energy infrastructure team, left the firm. “Stefan was hired to be the person with the operational skills to do very large projects – to do the sort of business that would be a €400 million – type equity deal,” says Hands. “The problem is that since Stefan joined us, the 20 percent returns we had targeted have come down enormously to sub 10 percent. The market has changed over the last couple of years and today the competition is very high.”

It is unclear whether Terra Firma will still raise the renewables fund. “We haven’t made a decision on that,” says Hands. “It depends on how competitive the market is in the smaller end of the market. We are not trying to raise funds and simply earn a lot of fees, we are primarily trying to make a substantial return on the money we have.”