Segulah fund closes on less than half its target

The Swedish firm was initially targeting SEK 5.6bn for its fifth vehicle, which held a first close in September 2014.

Segulah, a Sweden-headquartered mid-market buyout firm, has held a final close on its fifth fund on SEK 2.4 billion (€258 million; $294 million), less than half of its original target.

The firm began informal fundraising for Segulah V approximately two years ago, and held a first close in September 2014, as reported by Private Equity International. The fund was initially targeting SEK 5.6 billion, according to PEI Research & Analytics.

“We had a fair number of limited partners leaving us, but those that chose to re-up actually increased their commitment in absolute terms,” managing partner Sebastian Ehrnrooth told PEI. The GP commitment to Segulah V is “significantly larger than in your typical private equity fund in Europe”, which is “a trademark we have had throughout our history.”

Fund V’s investor base is a mix of new and returning investors. Investors include BlackRock, the University of Illinois Foundation, Caisse des depots et consignations, and Swedish fund of funds manager Coeli Private Equity according to regulatory filings.

Segulah has also historically targeted large international investors rather than domestic pension funds, and thus has been negatively affected by the move among those investors to rationalise manager relationships.

“Some of those institutions are very, very big, and we represented a tiny, tiny investment for them,” Ehrnrooth said. “Many limited partners today are looking to reduce their number of engagements, and I believe some left us [for that reason].”

For those existing investors that did not commit to the new fund, there were other drivers behind their decision, Ehrnrooth said. One was the departure of managing partner Christian Sievert to set up his own investment company, which coincided with the fund’s launch.

“The communication around Christian’s departure affected us in a more profound way than I think we anticipated at the time,” Ehrnrooth said.

Following the departure of Sievert in spring 2014, Segulah was led by founding partner Gabriel Urwitz, a former managing partner from 1994 to 2003, when he became chairman. Urwitz stepped into an executive chairman role in July 2015, when Ehrnrooth and Henrik Lif were appointed managing partners.

Added to the changes in leadership, “our performance, to be perfectly honest, has not been as good in recent times as it was in the past, that certainly contributed as well,” Ehrnrooth said.

As of September 2015, Segulah IV was delivering a net multiple of 1.1x and a net internal rate of return of 3.7 percent, according to online private equity marketplace Palico. There are eight portfolio companies remaining in the fund, according to Segulah’s website.

Fund V will look to make between eight and 10 platform investments, down from 12 investments in Fund IV. It will also write slightly smaller equity tickets, Ehrnrooth said, although by offering increased co-investment the overall deal size is likely to be similar to those in the previous fund.

“Effectively, the smaller fund size will open a better opportunity for our limited partners to co-invest,” Ehrnrooth said.

“Limited partners around the world have a strong interest in co-investment, and we intend to offer, and actually have already offered, limited partners the opportunity to co-invest alongside our fund,” Ehrnrooth said.

The firm could have gone on fundraising for Fund V, Ehrnrooth said, but as it was, the time the fund was on the road “was actually already a bit too long”, but was driven by one LP that was unable to commit to the vehicle before year end.

“Clearly we recognise that we’d much rather have a fund closed and ready and offer this opportunity than go on forever fundraising,” he added.

Segulah hired placement agent MVision to assist with the fundraising.

The fund’s predecessor, the 2007-vintage Segulah IV, closed on SEK 5.2 billion. MVision also assisted with the fundraising for that vehicle.

Mounir Guen, founder and chief executive officer at MVision, agreed that manager consolidation by larger LPs presents a challenge to those players of Segulah’s size.

“The larger pools of capital, if they are going to take a European position, [tend] to go with a pan-European or a more regional player, [rather] than something that’s very concentrated or country [specific],” he said.

“To absorb the interest from the capital that’s sitting out there focused on Europe, some of the larger [European] private equity houses have created small-cap focused funds, which also compete with the locals.”

Fund V has already made four investments. In June last year the vehicle backed specialist retailer Teknik-magasinet and translation business Semantix.

In February Fund V acquired construction contractor Zengun, which focuses on commercial construction projects in the greater Stockholm area. Earlier this week the firm announced its fourth investment in Hermes Medical Solutions, which provides systems and software for molecular imaging and radiology.

Ehrnrooth said the size of Fund V “is a size where we can make very attractive investments in the Nordic market [and] where we have excellent dealflow.”