We’re at the start of 2006, and the limited partner love affair with big private equity is showing no signs of cooling. Such is the institutional demand for mega LBO funds from brand name firms that double-digit billion dollar closings for Blackstone V and Apollo VI, the largest pools of buyout capital ever organised, seem mere formalities at this stage.
And while other leading US firms such as KKR and Bain are now making progress with new multi-billion offerings of their own, LPs are also keeping a keen eye on developments in Europe. There, CVC Capital Partners and BC Partners currently rank as the best-funded native players in the market, having set new fundraising records with capped closings on €6 billion and €5.8 billion respectively last year. But as a new round of big fundraising is getting underway, practitioners predict that by the end of the year, rival London-based houses Cinven, Charterhouse and Permira may well have moved the game further on.
Of course, not every investor with a significant allocation to private equity has equal fondness for the mega-mega buyout concept. Opinions differ for instance as to how big the ‘perfect’ fund should really be. Some argue that ‘too big’ is hardly possible given the advantages bestowed on a manager who can afford to write bigger cheques than the next house: less competition for deals, great positioning to acquire great companies and less need to bring in co-investors to fund transactions. “It really isn’t difficult to make a compelling argument for ‘big is beautiful’, and there certainly is room in the market for a number of very large groups”, says a London-based LP who has exposure to mega funds.
Other investors warn that beyond a certain threshold (though where that threshold is varies amongst this group), proprietors of ultra-large funds risk being left holding pools of capital that cannot be prudently invested, especially if current market conditions – arguably the most benign the industry has ever seen – change for the worse.
Yet others point out that big-ticket LBOs, however compelling in theory and regardless of the macro-environment in which they are being executed, essentially remain untested. KKR’s RJR Nabisco in 1989 aside (which certainly was not a money spinner), buyout groups do not have much of a history acquiring companies worth $5 billion or more.
Neither are there many case studies of fully realised investments of this magnitude. So who knows how well the exit risk can really be controlled in buyouts the size of a SunGard, a Hertz or a TDC? Besides, even before the advent of today’s mega funds, there has never been a guarantee in this business that a firm’s new Fund III or IV, which happens to be twice the size of its upper quartile predecessor, would deliver similar performance. But whatever the concerns, there is no question that super-size private equity funds are selling very well right now – so well in fact that the most popular managers are turning capital away. “You would never have thought that a $10 billion buyout fund would have restrictions in terms of access – but that is precisely what has happened,” notes Christopher Kojima, co-head of Goldman Sachs Private Equity Group in New York, a large and seasoned investor in the asset class.
So what does the road ahead look like from a seat at the front of the mega-buyout bus? Spend an hour discussing the phenomenon with Damon Buffini, managing partner of Permira, and you will likely leave thinking that the trip is far from over: in fact, it may be best to buckle up now as things are going to get even more interesting.
The big bang
In describing Permira’s capabilities as an international buyout firm focused primarily on Europe, Buffini essentially argues that the firm has built a large enough infrastructure to take the change-oriented investment style it refers to as “impact investing” and apply it to ever-larger deals across a range of markets. Currently fielding a 90-strong team of professionals (including 21 legal and financial specialists, investor relations professionals and support staff) to invest the €5.1 billion Permira Europe III fund closed in 2003, the firm has 14 European investments with an enterprise value of at least €1 billion each to its name – more, it says, than any other private equity firm active in Europe.
The firm’s origins date back to the mid-1980s, when a loose affiliation of single-country private equity firms sponsored by merchant bank Schroders operated in Europe, North America and Asia under the moniker Schroder Ventures International. In 1996, the teams covering the UK, Germany, France and Italy decided to merge into a pan-European, independently owned entity that became known as Schroder Ventures Europe.
Having closed a €890 million debut pan-European fund in 1997 and a €3.3 billion second fund in 2000, the firm formally ended its partnership with Schroders in 2001 and gave itself the name Permira. In 2002, it set up in New York, then moved into Stockholm (2003), Madrid (2004) and, in July 2005, to Tokyo – its most far flung outpost yet and confirmation, if one were needed, that Permira reckons to play in the global buyout league.