HEC Private Equity Value Creation Hall of Fame inductee 4: Hellman & Friedman V

Our fourth entry is the 2004-vintage fifth fund from San Francisco-based Hellman & Friedman. The fund – which focused on buyouts and special situations in areas such as marketing, asset management and financial services – raised $3.5 billion and has distributed a net multiple of 2.7x to investors.

Performance

Headline performance data**

Net IRR: 27.9% (top quartile)

PERACS Alpha*: 22.1% (top quartile)

Distributed to Paid In: 2.6x

Total Value to Paid In: 2.7x

According to PERACS, the performance analysis consultancy founded by Oliver Gottschalg, associate professor of strategy at HEC Paris and co-founder of its private equity observatory research centre, the fund compares extremely favourably with its relevant peers, both in terms of net IRR and total value-to-paid-in capital.

 

Peer group analysis

PERACS creates a peer group of relevant funds by assessing a fund’s individual deals and categorising them by sector, region, 3-year timing window and size, and then finds those funds whose deals overlapped most with these “strategic cells”. The relevant peers are:

 

The limited partners

Given Hellman & Friedman’s San Francisco roots, it comes as little surprise that Fund V is replete with public pensions from its home state; notable local participants include the California Public Employees’ Retirement System, Los Angeles City Employees’ Retirement System and San Francisco Employees’ Retirement System.

The fund also drew attention from north of the border, securing commitments from Ontario Municipal Employees Retirement System and Canada Pension Plan Investment Board. Investors were not limited to North America, with London-based Hermes GPE, Pantheon International and Smedvig Capital among those committing to the fund from overseas.

Manager profile

Headquarters: San Francisco

Key people: Philip Hammarskjold, chief executive (San Francisco); Patrick Healy, deputy chief executive (London)

Recent track record: Closed its eighth fund on $10.9 billion in 2014, according to PEI data. Its 2011-vintage Fund VII was returning a net IRR of 23.5 percent and a multiple of 2x as of 30 June 2017, according to CalPERS.

Investment focus: Ticket sizes of between $300 million and $1 billion in developed markets (source: State of New Jersey Investment Council documents)

Notable deals: In 2005, Fund V acquired digital advertising specialist DoubleClick in a take-private alongside JMI Equity for $1.1 billion. It exited the company through a sale to Google for $3.1 billion in 2008.

LP views: Investors note several qualities that contribute to the firm’s appeal, including the strength of its track record, the stability and experience levels of the team and its deep industry expertise. One LP PEI spoke to about Fund IV, when it was the first entry in the Hall of Fame said they were likely to commit to the next H&F fund and singled out the alignment of interest between the firm and its investors, noting that while it is now industry standard to offset monitoring and transaction costs, H&F has been doing this since inception.

John Morris, a managing director at HarbourVest – a long-time investor in the firm’s funds and an LP in Fund V – told PEI at the time of Fund IV’s induction that part of the firm’s success can be attributed to it investing just one pool of capital rather than multiple strategies. “The fact that the whole team is focused on one strategy gives the team a level of focus that has allowed them to outperform; their energies are not diluted.”

Standing out from the crowd

Hellman & Friedman’s success could be due in part to a particularly low level of “procyclicality” with its peers in terms of investment timing, the analysis noted. PERACS defines procyclicality as a measure of the fund’s investment patterns in comparison to the overall private equity universe. The unit is taken as a proxy measurement for quality of deal flow, demonstrating the funds ability to invest when others cannot and accelerate when its peers are slowing down.

Hellman & Friedman ranked far below the least procyclical quartile of its relevant peer group.


*PERACS Alpha measures value generation in excess of a public market equivalent, with the MSCI ACWI index as reference point.

**Hellman & Friedman did not comment or contribute to this article.