Cross-fund investments: Back for seconds

Baring Private Equity Asia has new plans for an old asset. In a $4.3 billion deal in co-operation with the Canada Pension Plan Investment Board, the firm plans to take private New York-listed Nord Anglia Education – for a second time. The firm's new investment came from its largest fund to date, $3.98 billion Fund VI, and represents Baring Asia's first cross-fund investment.

The firm already has a 67 percent stake in Nord Anglia, a private-school operator based in Hong Kong, having first acquired the company in August 2008 when it was listed in London. The $379 million take-private transaction used capital from the firm's 2005-vintage $490 million Baring Asia Private Equity Fund III and its 2008-vintage $1.5 billion Fund IV. The company was then listed on the New York Stock Exchange in a $300 million IPO in 2014. Through this latest transaction, the stake held by Funds III and IV will be acquired by Fund VI and CPPIB, along with all outstanding shares.

Under Baring Asia's ownership, Nord Anglia expanded into the US and the Middle East with a $237 million purchase of education company WCL Group in 2013.

“After nine years, we have developed a thorough understanding of the business and have high conviction that Nord Anglia's future is even more promising than its past,” Jean Eric Salata, Baring Asia's chief executive and founding partner, said in a statement.
  
IN THEIR FAVOUR

Such cross-fund investments, while not unusual, are generally disliked by limited partners, industry insiders say.

Sources agree the deal could give rise to potential conflicts of interest among the firm's investors, most of which are heavyweight LPs, including the Pennsylvania Public School Employees' Retirement System, Teacher Retirement System of Texas, Ontario Municipal Employees Retirement System and the Canadian Pension Plan Investment Board.

“If you sell one fund's portfolio company to another fund, there's a natural concern: Who do you want to get a good price? On paper, it's perfectly fine for a GP to do such a transaction, but investors would have concerns about this,” a Shanghai-based fund of funds manager tells Private Equity International. “If you are a GP and you manage multiple funds for different investors at the same time, there is always a natural conflict of interest.”

A managing partner at a Hong Kong-based fund manager echoed the same sentiment. “Whose interests are being looked after, Fund III, IV or VI?”

Baring's 2008-vintage Fund IV is posting lacklustre returns; as of 31 March 2016, it was showing an 8 percent internal rate of return and a 1.5x return multiple, according to PSERS documents. Fund III, meanwhile, is delivering a 52.55 percent IRR and 2.36x multiple.

It's too early to tell how two-year-old Fund VI is faring, but market sources suggest that once the new investment in Nord Anglia is completed, the fund will be 70 percent deployed – an indication that the GP could be gearing up for its next fundraise.

“The investment is sitting in the 2005 fund and it's now 2017 so it's coming to the end of the fund life, therefore there's an enormous pressure on that being sold,” says a Hong Kong-based placement agent. “The investment horizon for Fund III and Fund IV are also different, so there may be some conflict of interest in terms of what they are trying to do.”

The placement agent adds it would not be surprising if Baring Asia's move is driven by the lack of liquidity – that Funds III and IV haven't been able to exit this investment, and maybe it's better for Fund VI to go in and buy it.

Meanwhile, a source familiar with the matter told PEI that Baring Asia had been approached by parties to acquire Nord Anglia, and in those discussions concluded that it knew the business well and thought it could be a potential investment for Fund VI, subject to its limited partnership agreements.

The source added the firm followed its internal transparency standards as well as the requirements of the LPAs, and engaged the limited partner advisory councils of the respective funds on the investment, a process which resulted in the three LPACs independently approving both the divestment from Funds III and IV as well as the new investment from Fund VI.

Baring Asia declined to comment on the transaction.
  
FUTURE PLANS 

Industry sources agree that taking Nord Anglia private again with CPPIB is an interesting and strategic move. The pension plays an important role in the deal; it provides a third-party, independent validation to the price and mitigates the conflict of interest, the Hong Kong managing partner emphasises. 

While Nord Anglia may be CPPIB's first direct equity investment in private education, industry sources are quick to point out that the deal won't be challenging. After all, its partner has known the company for almost a decade, and the sector itself is not too complicated. Education is generally hot and draws wide interest from funds. Anyone buying the business, as long as it has decent management, should be able to make a success of it, according to two sources. The company, which operates 43 international schools globally and with more than 37,000 students from kindergarten to secondary education, has also demonstrated strong financial performance. 

In its latest earnings call, Andrew Fitzmaurice, chief executive of Nord Anglia, reported revenue increased 8.5 percent to $259.5 million and adjusted EBITDA was unchanged at $66.9 million. Across its network of schools in South-East Asia, China, Europe, the Middle East and the US, revenue increased by between 3 percent and 15 percent.

The education provider is also expecting to open two new campuses in Dublin in September 2018, and an additional one for its British School of Guangzhou in September 2019, while its second campus for St Andrew's International School Bangkok is on track for a September 2017 launch. In March, it completed the acquisition of the Prague British School in the Czech Republic.

“It also wouldn't surprise me if they are trying to list the company in Asia because valuations here are more attractive,” the placement agent says. “There might also be things you can do strategically with the company in the region, such as acquiring other further brands of international schools in, for example, Hong Kong and China.”

If the deal is done, industry sources say it will achieve many objectives for Baring Asia – collecting carry, providing an exit for Funds III and IV and notching a big institution like CPPIB as an early investor in the new fund. “You can see why this deal is very good for Baring Asia; whether it is good for Fund VI investors, we will know in three years' time.”

At the end of the day, industry sources believe, Baring Asia's LPs will give the green light. But they will be watching. The next fundraise could hinge on the deal's success.