Graphite Capital Seeks Annex Fund

LONDON (Reuters) – British private equity firm Graphite Capital has approached investors to top up its existing buyout fund as it targets bigger deals relying on more equity and less borrowing, sources familiar with the situation said.

Graphite, best-known for noodle bar chain Wagamama and electronics retailer Maplin, raised 555 million pounds ($912 million) for its seventh buyout fund at the height of the buyout boom in 2007, limiting the number of investors and capping their commitments to retain its mid-market deal focus.

But in a sign of how private equity firms are having to cut their cloth to current market conditions, Graphite has gone back to investors to ask for an additional 35 million pounds to help it do deals at the top-end of its 20-200 million enterprise value range, two sources said on Thursday.

“Their rationale is that at this point in the cycle they would prefer to be doing deals at the upper end of their enterprise value range, rather than smaller deals which they perceive as being riskier,” said one source.

Graphite declined to comment.

CLIMATE CHANGE

Private equity firms are having to write larger equity cheques — often in the region of 50 percent of a deal’s value — as leverage remains hard to obtain.

Graphite’s seventh fund included a separate co-investment fund of 80 million pounds to put into larger deals. The new pool of capital will allow the firm to pursue larger deals without putting more than 8 percent of the fund into any single investment, the sources said.

At the same time as debt funding has become harder to secure, private equity firms are struggling under the weight of debt they piled on portfolio companies — falling company revenues push them up against banking covenants and lenders force them to inject more equity or face losing investments.

Those funds that have run out of capital to deal with problem companies are seen returning cap in hand to investors for new money to make capital injections.

U.S. peer KKR recently approached investors in its second European fund, which holds high-profile investments including pharmacy chain Alliance Boots and German broadcaster ProSiebenSat.1 (PSMG_p.DE), for 730 million euros to invest in specific portfolio companies. 

In contrast, Graphite’s fund is only about 20 percent invested in companies including luxury shoe retailer Kurt Geiger, bought from Barclays Private Equity in 2008 for 95 million pounds and care home group Willowbrook.

Unlike a main fund, in which investors pay management fees of up to 2 percent on the capital committed, Graphite will only charge management fees on cash drawn from the top-up fund, one source said. ($1 = 0.6084 pound)

By Simon Meads