Unlike its peers, Candover has officially signalled a shift away from larger LBOs – investments with an enterprise value of more than €500m traditionally – saying that a restructuring of the fund will also involve a “revised investment strategy, in light of both a smaller fund and the significant changes in the global economy in the last six months”.
The likely translation is: Mid-market. Permira has rarely played in the mega LBO space, and while it is known to be looking at smaller deals, especially those involving already indebted businesses, a shift downwards is not expected to be on the cards.
Permira said in December that its projected €11.1bn fund – its largest to date – will be no less than €9.6bn in size, with 90% of LPs sticking to their original commitments, the main change involving SVG, one of Permira’s longest-running fund investors, shifting its commitment from £796.3m to £343.8m.
Candover, on the other hand, was targeting €5bn for its fund, announced last March. The fund reached a second close of €2.8bn last August, including a €1bn commitment from Candover Investments – according to a regulatory announcement, the reduction in Candover’s own €1bn commitment is likely to be significant.
Liquidity concerns have affected a number of institutional investors regarding capital calls and the public markets have not been any kinder to Candover than most other publicly-listed stocks. For the past year, Candover Investments has been on a downward slide, plunging from 2,205p at the end of February 2008 to 389p at close on February 17. Despite the fund news, or perhaps because of the fund news, Candover Investment shares were up slightly, reaching 394p by late morning, before dropping to 392p at 2pm GMT.
By mid-February, total commitments have only reached €3bn. Considering Candover’s last fund raised €3.5bn in 2005, this may be one of the first examples of a large buyout firm, one generally regarded to be among the top tier, reducing the size of a successive fund.
Candover 2005 was oversubscribed, raised €500m more than its original target of €3bn in six months, and received commitments from 106 investors worldwide, including €500m from Candover Investments. Approximately 80% of commitments to that fund came from existing investors, which included CalPERS, Canada Pension Plan, The Metropolitan Museum of Art, HarbourVest, Princeton University and funds controlled by Standard Life Investments. Investors new to Candover at that time included Temasek, through its Havelock Fund Investments subsidiary, Partners Group, SPF Beheer and Massachussetts PRIM.
Investors in Candover’s €2.7bn 2001 fund included Ap Fonden 3, Invesco Private Capital, Martin Currie & Co and Bristol-Myers Squibb.
Since July 1 last year, Candover has made two new investments: £141.8m in the purchase of a 40% minority stake in gym equipment business Technogym, funded from Candover 2005; and £409.8m in the £1.8bn acquisition of oil field services group Expro International, bought alongside Goldman Sachs and AlpInvest, funded from both the 2005 fund and the 2008 vehicle.
To date, Expro International is the only investment from the 2008 fund. In Candover’s half-yearly report last August, funding for Expro was declared as two thirds from the 2008 fund and one third from the 2005 fund, suggesting that approximately £270m has already been deployed from the current vehicle. That would be a significant chunk of a €3bn fund, let alone a significantly pared-down vehicle.
Realising value from its previous investments may also be difficult. In October, Candover, via its listed Candover Investments vehicle, warned that the economic slowdown and a reduction in the trading multiples of comparable quoted companies would “put pressure on year end valuations”.
Candover’s portfolio is relatively young, with 27% of the portfolio less than 18 months old and another 64% less than 30 months old. This has previously been scored as continued success despite the credit crunch, although many market pundits suggest that deals done by the larger buyout firms in 2006 and 2007 will prove to have been heavily over-priced and over-leveraged.
In addition, 36% of the portfolio last August was housed in Britain and, despite the firm’s relatively sector agnostic approach, industrials accounted at that point for 40% of its portfolio.
Whether this will impact on Candover’s recent foray into Asia, having opened offices in Hong Kong and Mumbai in February and August of last year, is uncertain. But it will almost certainly mean less income from the current portfolio and much less capital for wages, rent and keeping its big hitters owing to a smaller upcoming management fee and performance fees a long way off.
Keeping staff, and keeping them happy, will be just another hole that needs plugging. TPG may have been able to earn some goodwill from institutional investors by voluntarily reducing its management fees (and Bain Capital has just waived its quarterly management fees), but the balancing act of keeping investors, the public and staff satisfied – all of which of have differing needs and objectives – may prove more of a challenge for private equity than the credit crunch itself.