SVG flourishes as Permira defies critics

SVG Capital has reaped the rewards of backing UK buyout firm Permira – the group has out-performed the stock market by about ten per cent a year since 1996, and saw a 24 percent rise in net asset value in 2006. However, it warned of trickier times ahead.

SVG Capital, a listed group that is the biggest investor in UK-based Permira’s private equity funds, has recorded another strong set of year-end results, as it benefited from improved operating performance at the buyout firm’s portfolio companies.

The group saw net asset value increase by 24.2 percent to 859.2 pence per share, once the value of its flourishing fund management business SVG Advisers had been taken into account.

SVG chairman Nick Ferguson told PEO that he took particular pride in the company’s long-term market performance. According to SVG, its share price has outperformed the FTSE All-Share by 9.9 percent per annum since the company listed in 1996.

Ferguson said the recent calls for greater transparency had been a good wake-up call for the industry. “Private equity is a misnomer now given the scale of the industry – we are in the public market. The industry should be more transparent – it’s important that we get our message across and make a positive case for the industry.”

SVG’s results provide an in-depth look into operating performance at Permira, the buyout firm that has ironically been at the centre of recent trade union criticisms that the industry lacks transparency. SVG is Permira’s biggest single investor, contributing €2.8 billion ($3.7 billion) to the €11 billion fund the firm raised last year – which according to SVG is already 24 percent committed just nine months after the final close.

The AA, the vehicle recovery business that sparked Permira’s original confrontation with the GMB trade union, was actually one of the strongest performers in the portfolio. Improved earnings took the value of SVG’s stake to £39.8 million, while a second recapitalisation returned proceeds of £27.1 million, meaning the investment has already returned 1.1 times cost. Ferguson said the AA was ahead on all of its metrics, while vehicle recovery times – the most important metric of its operating efficiency – were also improving.

Benelux retailer Maxeda, another strong Permira performer, also completed a successful recapitalisation, returning £10.6 million to SVG and bringing the total proceeds to 1.2 times cost. Elsewhere there were smaller write-ups for New Look, DinoSol and Intelsat.

In total, distributions from the private equity portfolio totalled £307.5 million. Big realisations included the sale of hotel chain Travelodge, which yielded proceeds of £66.9 million.

SVG invested £383.2 million during the year, including its biggest bet yet – a £147 million contribution to the $17.6 billion acquisition of US semiconductor business Freescale. SVG also invested £79 million in Permira’s take-private of Borsodchem, a European chemicals group.

SVG is seeking shareholder approval to expand into other asset classes in the coming year. The group has already committed up to €35 million to a CLO fund, and hopes to explore other alternative asset classes in 2007. Ferguson said: “We do want to explore other areas – it’s an extra offering, but it will be minute compared to our main business. Our prime purpose remains investing in private equity.”

However, Ferguson did express a note of caution about the year ahead. “The signs that we are in the second part of an ‘up-cycle’ are increasing. Multiples paid are rising and so are interest rates and the spreads between these two are therefore narrowing. So far these markets have proved resistant to recent economic and political problems. Whether this will continue in the face of either increasing inflation or a specific market reverse remains to be seen.”