Doughty calls time-out

With ample amounts of liquidity in the marketplace, and seemingly improving macroeconomics, raising capital for Europe has become a good deal easier than it was at the height of the economic crisis. Private equity firms that have taken advantage recently include Equistone Partners Europe, which in April reached the €2 billion hard-cap for its fifth fund having spent just six months in market; Exponent Private Equity, which managed to turn around an initially difficult campaign to raise £1 billion for its Fund III; and also Waterland, a Netherlands-based GP, which collected €1.25 billion for Waterland Private Equity VI, plus €300 million for its WPEF VI Overflow Fund, which will co-invest with the main fund in larger deals.

But not everyone is having an easy ride on the fundraising trail. In April, Doughty Hanson, one of Europe’s oldest firms, said it had abandoned its fundraising efforts for Fund VI. The firm had been in market since October 2013 in the hope of collecting €2 billion, but was unable to reach a first close.

The fund would have been Doughty’s first since the untimely death of co-founder Nigel Doughty in February 2012. Doughty had been a founding member of Standard Chartered Bank’s pioneering buyout unit in 1984, where he met Dick Hanson. In 1990, the pair established CWB Partners, a private equity joint venture between Standard Chartered and Westdeutsche Landesbank. In 1990 they spun out of CWB to form Doughty Hanson as an independent group, which went on to become a leading member of Europe’s private equity establishment.

RESHAPING THE FIRM

Doughty’s passing forced the firm to regroup. A new corporate entity was formed, owned wholly by Hanson and an employee trust. The new structure was to be the vehicle for future funds raised, and by Fund VII, participants in the employee trust would own the majority of the firm, Doughty Hanson said at the time.

However, fundraising proved difficult. In January of this year, Doughty Hanson and HarbourVest Partners restructured Doughty Hanson Fund IV, a 2003 vintage, and Fund V (2006). Under the deal, the firm offered LPs in its €1.5 billion Fund IV and €3 billion Fund V the option to liquidate their stakes at a price set by Harbourvest. Few LPs in the funds exercised the liquidation option, two sources familiar with the matter told PEI’s sister title Secondaries Investor. HarbourVest paid €150 million for select stakes in the two funds at a small discount to NAV, and also committed €65 million to the new vehicle. HarbourVest declined to comment for this story.

While the news of the stalled fundraise is disappointing for those investors that did commit to the new Fund VI, the firm is taking a pragmatic view. The decision to discontinue the campaign “pre-empts further prolonged uncertainty”, Stephen Marquardt, chief executive of Doughty Hanson, said in a statement. “We will now enter into a period of review with our employees and investors to explore the possibility of another fund in the future,” he added.

Doughty will not make any new platform investments from its Fund V, although it has approximately €300 million left for add-on acquisitions. The firm will concentrate on maximising the value of the remaining portfolio companies in Funds IV and V. The four companies remaining in Fund IV are Balta, KP1, Zobele and TV3 while in Fund V ASCO, Eurofiber, LM Wind Power and TMF Group remain.

According to a source familiar with the matter, a sales process is now underway for TV3, an Irish broadcaster, which has attracted interest from other private equity houses.
Doughty Hanson declined to comment.

LOOKING TO THE FUTURE

One challenge for the firm will be to retain its cadre of investment professionals, especially dealmakers with a penchant for sourcing and executing new investments rather than nurturing the existing portfolio. It says the team remains incentivised to continue its harvesting work on the portfolio: “Significant co-investment by the team in Funds IV and V and the prospect of carried interest as a result of strong performance, means the interests of the professionals at Doughty Hanson and our investors remain totally aligned,” is how Marquardt put it in the April statement.

The firm has managed to secure some good exits in recent years, and it has returned approximately €1 billion annually to investors in the last three years. Among the highlights was a 2.6x return on HellermannTyton, a UK maker of insulation products; a 2.1x return on Vue Entertainment, a cinema company; and 2x money on Quirón, a Spanish healthcare business. On Tumi, the bags and luggage maker, it has so far netted nearly six times its money.

However, one LP familiar with the firm described its overall performance as good but “not outstanding”. At the end of 2014, Doughty Hanson IV was valued at 1.5x money and an internal rate of return of 9 percent net of fees, the LP told PEI, whilst Fund V was valued at 1.3x with an IRR of 7 percent. The 1997 Doughty Hanson III, according to data from Washington State Investment Board dated 30 September 2014, returned 1.8x money.

Sources also cited the loss of its co-founder, staff departures and ongoing uncertainty around succession as other reasons why the fundraising may have stalled.

In today’s discerning market, it doesn’t take much for investors’ faith in a manager to start to erode, and Doughty Hanson appears to have fallen victim to this phenomenon.

The firm has stated that it won’t pursue a deal-by-deal investment model, which effectively means that it will not make any new investments until it is able to raise another fund in the future. While it hasn’t ruled out trying to raise another vehicle, achieving such a comeback will be challenging, investors say.