This is not an easy time for large buyout firms. The credit crisis, now into its second year, is showing no signs of subsiding, and financing for new investments remains difficult to arrange. At the same time, worsening economic conditions are making life harder for existing portfolio companies as well; monitoring the health of these often highly geared assets is now a priority for many sponsors.
Says a London-based LP: “We're certainly keeping an eye on the big buyout portfolios that we're in.”
But despite uncertainty looming in the markets, the priorities for private equity mega-funds seem clear-cut. Be certain your organisation is sufficiently robust to weather the storm; do everything in your power to keep your portfolio on an even keel; go after new investment opportunities, but with discipline and caution; and make sure your investors understand what it is you're doing. Business as usual you might say – albeit with an added sense of urgency.
At Permira, Kurt Björklund, 39, and Tom Lister, 44, are among the key people co-ordinating the firm's work in all these areas. The two men were promoted to co-managing partners at the beginning of the year, when Damon Buffini, previously the sole incumbent in the role, became chairman.
The co-managing partners run the firm operationally and have joint responsibility for a wide array of things, including the overall structure of the business, resource allocation, recruitment, compensation, relationship management, internal and external communications and so on. They chair the firm's executive committee, which comprises a group of seven partners who meet every week in a 90-minute video conference and once a month for a half-day face-to-face. For the time being, Buffini and veteran fundminder Veronica Eng participate in “ExCo” meetings to ensure an efficient knowledge transfer, but will eventually leave it entirely to the seven permanent committee members to manage the firm day-today.
Buffini's role now is to chair the Permira board, which determines overall strategy and thinks about funding and investor relations. He also presides over the investment committee, which decides where and how the firm puts its capital to work. Björklund and Lister are members of both groups.
During an interview at Permira's London office in June, a day after the firm's annual investor meeting, the resolutely upbeat co-managing partners say that the new structure is working well already. Adopting it was important, they say, because Permira's ever-greater breadth and depth required substantial changes to the firm's managerial architecture.
After relentless expansion over the past 10 years and an aggressive push into global markets since 2005, the firm now has 11 offices around the world. The Tokyo office has been operational since 2005, the Hong Kong office opened in July (former Goldman Sachs veteran Henry Chen had just been revealed as the firm's new head of Greater China at the time of going to press), and San Francisco is due to open later this year. Some 130 investment professionals work across six sector teams.
Permira today is a giant of the business whichever way you measure it. Last year, according to its Annual Review 2007, it deployed €3.4 billion ($5.1 billion) of equity in four new investments and realised €3.5 billion from a series of disposals. At the end of 2007, 23 portfolio companies employed approximately 220,000 people worldwide. According to Permira, the eight businesses currently owned by P4, the firm's €11.1 billion fund closed in 2006, all have exposure to emerging markets growth; seven have international operations in at least two regions; and two are based in Asia.
What this adds up to is an increasingly complex operation in need of astute management – and according to Björklund, the new set-up is designed to deliver it: “There is now a clear line between the longer-term business development responsibility at board level, the investment committee and what Tom and I do in terms of running the business,” he says.
PERMIRA AT A GLANCE
|Founded: 1985 (as Schroder Ventures)|
|Offices: Frankfurt, Guernsey, Hong Kong, London, Luxembourg,|
|Madrid, Milan, New York, Paris, Stockholm, Tokyo|
|Total private equity capital raised since inception: €22 billion|
|Current fund: P4, closed in September 2006 on €11.1 billion|
|Other funds raised: Several Permira country funds (1985-95),|
|Permira I (1996, €900 million), Permira II (2000, €3.5 billion),|
|Permira III (€5.1 billion, 2003)|
|Portfolio companies in P4: Arysta Life Science, BorsodChem,|
|Freescale Semiconductor, Galaxy Entertainment Group,|
|Marazzi Group, ProSiebenSat.1, Provimi, Valentino|
DON'T MENTION THE O-WORD
With world markets and economies under pressure, Permira will need to demonstrate that the new infrastructure is indeed the right one. Like its peers, the firm has some challenges to deal with.
In October 2007, Permira invested €593 million in a large minority stake in Galaxy Entertainment Group, a listed Macao-based casino operator. Since then the company's shares have lost more than half their market value. In March 2008, SVG Capital said in its annual results statement that Galaxy was one of four Permira investments it had written down, alongside UK gambling company Gala Coral, US technology group Freescale Semiconductor, and ProSiebenSat.1, a German media group.
ProSiebenSat.1 also produced a barrage of bad press for Permira in the TV operator's native Germany earlier this year, as did Hugo Boss, the Germany-based luxury fashion group also in the Permira portfolio. Amid a series of senior management changes at both companies, and dividend payments adding further leverage to their balance sheets, sections of the German media have been highly critical of Permira's style of ownership.
Björklund and Lister speak confidently of the prospects of the companies the firm has recently added to the portfolio, and are also quick to address the situation in Germany.
There, says Björklund, as in other countries, a number of private equity transactions have been under intense scrutiny, and Permira has been at the receiving end of much of this less than friendly coverage lately. He also says: “We feel we're doing what's right for the companies we have invested in, what's right for our funds, and we feel we're building value for the long term in a meaningful and thoughtful way.”
Björklund adds that people criticising the dividends ProSieben and Hugo Boss have paid out probably don't realise that Permira's funds were not the recipients: “The dividends were part of the acquisition structure, strictly about restructuring a holding chain. The rational observer should not see anything greedy in it; the rational observer might see a more efficient financing structure.”
Turning to Galaxy, the two men point out that it is one of Permira's youngest investments, and that neither the original rationale for the deal nor the company's longterm prospects – underpinned by strong growth in the market, a valuable land bank and the ongoing building of one of the largest casino and hotel complexes in the world – have changed. They also note that gaming stocks around the world have fallen sharply in value, a trend beyond the firm's control.
As for the fact that Permira doesn't usually purchase minority positions in businesses – one P4 investor speaking to PEI recently described Galaxy as an “offstrategy” investment – Björklund has no qualms: “Together with the founding family, we have joint control of the business, and we have very strong governance rights. Besides, gaming is a sector we have extensively invested in before.” Off-strategy? Björklund and Lister do not think so.
Neither do they have any time at all for the suggestion that Permira's recent activity could be described as “opportunistic”. Lister is adamant that the firm has been disciplined about preserving its culture of operating as one firm and one partnership. The changes that have taken place, such as the building out of the international office network, are the result of long-term planning and were designed to strengthen and continuously improve the firm's dominant business: private equity.
He says: “It's funny: people say we've gone into Asia opportunistically, which is what they said about North America five years ago. Well, no, actually: in 2002, this firm thoughtfully went and sent people out who were very good at beginning to build a business in the US. We had a plan, we did it effectively, made three investments, exited two, then I came on board in November 2005. Today, people don't describe our US business as opportunistic. It's now conventional wisdom that it was what should have been done. It was not conventional wisdom at the time, and we are big beneficiaries: meaningful portions of revenue for our European and Asian businesses come from North America. We've been very good at geographic expansion. It wasn't opportunistic at all.”
Björklund weighs in, too, lest there still be any ambiguity over this point: “Where you say ‘opportunistic’, I say ‘entrepreneurial’. The opportunity set is shifting depending on what the market opportunity looks like, and we will follow the shift entrepreneurially. There is an incredibly important theme here: as the organisation grows and becomes more complicated, safeguarding that entrepreneurialism that created the firm is paramount.”
Therein lies a key task for the managing partners. “We work very hard between the two of us and the executive committee to make sure we don't do anything that puts that at risk,” Lister concludes.
WHO IS WHO
|The Permira Board||Executive Committee||Investment Committees|
|Damon Buffini (Chairman)||Kurt Björklund||Damon Buffini (Chairman)|
|Kurt Björklund||Tom Lister||Kurt Björklund|
|Nigel Carey (Non-Executive)||Martin Clarke (Head of Consumer sector||Veronica Eng|
|Veronica Eng||team)||Guido Paolo Gamucci|
|Guido Paolo Gamucci||Carlos Mallo (Head of Spain)||Thomas Krenz|
|Paul Guilbert (Non-Executive)||Carl Parker (Head of UK and||Tom Lister|
|Vic Holmes (Non-Executive)||TMT sector team)||Charles Sherwood|
|Thomas Krenz||Jörg Rockenhäuser (Head of Germany)||Martin Weckwerth|
|Tom Lister||Nicola Volpi (Co-head of Italy)|