Back from the brink

2009 was something of an annus horribilis for European mid-market firm PAI Partners. The firm’s €5.4 billion fifth buyout fund was slashed to €2.7 billion by LPs after the departure of chief executive Dominique Mégret and senior partner Bertrand Meunier triggered a key man clause.

The pair were ousted in what some investors regarded as a ‘coup’ following months of lobbying by Lionel Zinsou, who replaced Mégret at the firm’s helm. (Mégret and Meunier went on to launch a buyout firm called M&M Capital in 2011.)

Five years on PAI has just closed PAI Europe VI on €3.3 billion, smashing through its initial target and hard-cap of €3 billion.

An impressive result, no doubt, but one not achieved without hard graft.

After a substantial period of pre-marketing, PAI Europe VI officially launched in early 2013 and managed to get to a first close on €1.4 billion, announced in January 2014.

PAI offered a small fee discount to coax investors into the first close. Despite the management scuffle, PAI also had a good track record on which to trade. Since 2011 the firm has made 10 exits, returning around €7 billion to its investors at an average return of 3.5x money.

The beleaguered Fund V has also performed well so far. At fully twice the size of its previous vehicle, some argued that Fund V was in fact too big for a manager like PAI, which had made its name with vehicles under the €3 billion mark, and therefore the reduction was something of a right-sizing. At the time of writing, the vehicle had returned around 50 percent of its capital to investors at an average of 2.4x cost, proving that the firm really did mean what it said when it claimed the reduction would not affect its performance.

This likely contributed to the strong support shown by returning institutional investors which, according to PAI, increased their allocation to the vehicle by an average of 30 percent compared to PAI Europe V.

Once the first close was secured, PAI could embark on the one thing guaranteed to make an investment vehicle more attractive: building the portfolio.

Before the end of 2014 Fund VI had acquired five businesses, and added a sixth, specialty outdoor equipment and clothing retailer AS Adventure Group, in February 2015, bringing the total deployed capital from the vehicle up to 23 percent by the final close.

Its investments include French nursing home business Domus VI, French food business Labeyrie Fine Foods, which the firm acquired from LBO France in a €590 million deal, and Custom Sensors & Technologies, a business unit of French-based Schneider Electric which it acquired alongside The Carlyle Group in a $900 million deal.

“Already deploying Fund VI in six compelling deals definitely helped accelerate the fundraising, giving investors a concrete feel for the fund, its strategy and the strong investment opportunity in Continental Europe,” says Richard Howell, PAI partner and head of the investor team.

The more PAI invested the capital, the less of a blind pool the fund became, giving new investors – who could see the investment strategy in action – the confidence that PAI’s team could deliver on its promises.

Despite whispers in the market that PAI would be lucky to raise another fund, at the eleventh hour the firm was turning investors away and pushing for an extended hard-cap, proving that it’s never a good idea to write off the competition.