Hellman & Friedman IX: No hurdle, no problem

Investor documents reveal the firm has not included a preferred return hurdle for its ninth flagship fund, which is seeking $15bn.

Hellman & Friedman IX, which is currently in market seeking $15 billion, has no preferred return hurdle within its fee structure, according to documents prepared for a New Mexico State Investment Council meeting on Tuesday.

The fund’s target is also $4 billion – or roughly 35 percent – larger than its predecessor, which closed in 2014. New Mexico SIC will vote on a commitment of up to $100 million to the fund on Tuesday. If approved, this would be the $24 billion sovereign wealth fund’s first commitment to a Hellman & Friedman fund.

At a 9 August investment committee meeting – the summary notes for which were included in the 28 August meeting materials – the lack of a preferred return hurdle and the increase in fund size were raised as potential risks, but SIC staff and its investment advisor Pavilion considered these to be “sufficiently mitigated”.

“Relative to historical H&F funds, the larger commitment size should allow H&F to become less reliant on co-investing and other private equity firms to close large-scale transactions,” the notes read.

“H&F’s return history has consistently generated performance that exceeds a typical preferred return hurdle of 7-8 percent, and the firm has fostered alignment in multiple ways. These include the firm’s focus on a single product and strategy, employee ownership of 100 percent of the GP and carried interest, no fees charged to portfolio companies, 100 percent fee offset and meaningful GP commitment.”

It is unclear whether the firm’s eighth fund had a hurdle. Hellman & Friedman could not be reached for comment at press time.

In making such a move, Hellman & Friedman joins other mega-firms including Advent International, whose $13 billion eighth flagship fund closed in 2016 with no hurdle. CVC Capital Partners trimmed the hurdle down to 6 percent on its latest flagship fund, and Blackstone has settled on 6 percent for its latest infrastructure fund after some back and forth with investors.

What Advent, CVC and Hellman & Friedman have in common is a long track record and strong performance. Hellman & Friedman is described in the documents as having “one of the most consistent track records of outperformance in the private equity industry”.

Fund VIII was delivering a net internal rate of return of 51.4 percent and a net investment multiple of 1.2x as of 31 December, according to the California Public Employees Retirement System, although the pension notes that this fund is too young for these figures to be meaningful.

Fund IV, a $2 billion 2000-vintage vehicle, and Fund V, a $3.5 billion 2004-vintage vehicle, were both named in the Private Equity Hall of Fame for outstanding returns.

Meanwhile, Advent’s seventh fund, a 2012-vintage, was delivering a 19.2 percent net IRR and a 1.7x investment multiple, and CVC’s 2013-vintage sixth offering was delivering a 14.7 percent net IRR and a 1.2x investment multiple as of 31 December, per CalPERS figures.

Research from law firm MJ Hudson shows a growing number of GPs chipping away at the traditional 8 percent hurdle rate.

The proportion of GPs setting hurdle rates below 8 percent more than doubled to 15.3 percent of those surveyed year-on-year, and funds with sub-8 percent hurdle rates accounted for around one-fifth of targeted capital in the survey.

According to the documents, Hellman & Friedman IX plans to build a portfolio of nine to 15 investments, ranging in size from $500 million to $3 billion, in North America and Europe. The portfolio will have a primary focus on seven core sectors: software; financial services; business and business information services; healthcare; internet and media; energy and industrials; and retail and consumer.

Hellman & Friedman co-chief executive Philip Hammarskjold is planning to move into an executive chairman position in January 2019 amid a year-long succession process, as reported by Private Equity International. Co-chief Patrick Healy will become sole chief executive, according to a Hamilton Lane note prepared for Santa Barbara County Employees’ Retirement System.

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