Terra Firma to Market Fund in 2012

BOSTON, June 8 (Reuters) – Private equity firm Terra Firma, which made a high-profile, ill-fated investment in music group EMI, is expected to start officially marketing its new fund early in 2012, a source familiar with the firm’s plans said on Wednesday.

Terra Firma has been preparing the ground for a new fund and in a recent letter to investors, said its next buyout fund would likely be 2 billion to 3 billion euros ($2.9 billion to $4.4 billion), significantly smaller than the 5.4 billion euros the firm raised in 2007.

The firm is expected to start talking to investors about the new fund towards the end of the year with official marketing documents coming early in 2012, that source said.

Terra Firma’s founder Guy Hands said on Wednesday at the SuperReturn conference in Boston that private equity firms should focus on alternatives to large deals and that there is a long-term problem for large publicly traded mega-funds.

“To keep the public shareholders happy, the global franchises need to keep raising more and more funds, ideally larger, which means that returns over time tend to go down,” Hands said in his speech.

A number of private equity firms are public or considering going public, such as Blackstone Group, KKR and Co, Apollo Global Management and Carlyle Group.

A fund of 2 billion to 3 billion euros would allow Terra Firma to go back to striking deals requiring an initial equity investment of 250 million to 500 million euros — again significantly smaller than its 4 billion pound ($6.57 billion) deal for EMI, which saw the firm’s entire 1.7 billion pound investment wiped out when Citigroup seized control in February.

It would be a turnaround for a firm that some speculated would not raise a fund again after the EMI investment.

As it goes back to fundraising, the pressure will be on to prove to investors that EMI was a one-off and that new acquisitions, such as Italy’s market-leading solar power producer Rete Rinnovabile, acquired this year in a 641 million euro deal, can produce better returns.

Terra Firma bought EMI in 2007 for 4 billion pounds, but in one of the most high-profile examples of a buyout firm losing a company to lenders, Citigroup seized control of the business last month after EMI defaulted.

Terra Firm split the equity investment between its second and third private equity funds, while Citigroup backed the deal with 2.6 billion pounds of loans.

“Raising new funds is going to be much more difficult and most will have to settle for funds that are half the size of what could have been raised during the credit boom,” Hands said during the speech.

Private equity firms raised huge funds during the credit boom of 2005-07, using funds raised to strike multibillion-dollar leveraged buyout deals.

The credit crisis constrained investors’ ability to commit funds to private equity and reduced the firms’ ability to do large deals. Fund sizes have been shrinking since. Blackstone Group, for example, recently raised about $15 billion for its latest buyout fund — smaller than the mammoth fund of about $20 billion raised during the boom.

Cerberus said on Tuesday that its next fund will be significantly smaller than its previous fund.
Firms typically charge a fee of about 1.5 percent to 2 percent of the fund size, and take about 20 percent of the profit, which means the larger a fund becomes the larger is the fee income.

Terra Firm’s new fund is expected to charge fees around the same level as the previous fund, which charged 1.5 percent, the source said. About 50 percent of its existing investors are expected to re-invest in the new fund, the source said.

(By Megan Davies; additional reporting by Simon Meads in London; Editing by Gary Hill)