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Private Equity Roundup
Consumer Plays, Bonus Pay & Problems In The U.K.

PRIVATE EQUITY ROUNDUP: CONSUMER PLAYS, BONUS PAY & PROBLEMS IN THE U.K.

CONTENTS

FROM PRIVATE EQUITY ANALYST

DESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPING FOR CONSUMER DEALS............................................................... 4

PE BONUSES RISE IN 2011 AMID LONG-TERM PRESSURE ON PAY................................................................................................ 10

PATIENCE PAYS OFF FOR FRIEDMAN FLEISCHER & LOWE’S MASTO.............................................................................................12

FROM PRIVATE EQUITY NEWS

CEE BUYOUT EXECS HOLD THEIR BREATH...................................................................................................................................... 14

GIC MULLS SALE OF $1B SECONDARIES INTERESTS......................................................................................................................17

UK INNOVATION FUND BECOMES A JUMBO FLOP.......................................................................................................................... 18

2 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book

INTRODUCTION

Exclusive Global Fund News & Industry Insights

No matter which side of the fund negotiating table you’re on, you must have a
clear picture of what’s going on across the market - where GPs are finding the
best returns, trends in terms, pay and compliance, which firms are prospering
or struggling and who’s behind landmark deals. Only Dow Jones provides
a comprehensive – and critical – perspective of the global fund-raising
environment with exclusive reporting, accurate research and unbiased analysis
and commentary.

This Private Equity Roundup features a collection of hand-selected articles
from Private Equity Analyst and Private Equity News that detail some of the
latest trends and troubles affecting the asset class in the U.S. and Europe.

Sincerely,
Robert Dunn
Director, Product Management, Dow Jones Private Equity & Venture Capital
Dow Jones & Company

Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book | 3

From Private Equity Analyst

DESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPING
FOR CONSUMER DEALS
Private equity increasingly sees TSG Consumer Partners’ fund raising for its complex amid ongoing economic uncertainty
a pot of gold at the end of the sixth vehicle appeared to be over before it even and sluggish consumer demand. Firms that
consumer rainbow, but it remains began. In less than 60 days, the fund garnered are banking on the consumer sector increas-
to be seen if the slew of new over $2 billion of interest for TSG 6 LP, which ingly seek companies they believe have the
consumer funds can translate is hard capped at $1.2 billion and will undoubt- power to thrive in a slow-growth environment.
into high-end returns. edly leave some investors out of the fray. “In a world where growth is 1% to 2%, it basi-
Yet TSG isn’t the only private equity firm seek- cally comes down to a market share game
By Beina Xu
ing capital for a consumer-focused fund this – either you’re going to take it, or lose it,”
December 2011
year. Roughly a dozen private equity firms spe- Kayvan Heravi, managing director at LNK
cializing in different corners of the consumer Partners, said at a recent retail conference.
space have either launched marketing efforts An LP House Divided
for new funds or plan to do so in the next 12 Before they can focus on deals, consumer-
months (see chart on page 16). Add to that focused private equity firms first must raise
capital raised by firms such as Leonard Green capital, which requires wooing a community of
& Partners and Berkshire Partners, which investors with varying degrees of skepticism
include consumer products as one of a hand- toward a dedicated consumer strategy.
ful of industry targets within their latest funds,
The head of private equity at one large U.S.
and buyout firms should be well capitalized
endowment said that many investors don’t
to snap up consumer brands over the next
have a specialized interest in consumer-
few years.
focused funds. Instead, those investors
However, the landscape in which these firms prefer to back firms that target several sec-
look to put their money to work has grown more tors beyond the consumer space, to spread



the risk of potentially being overexposed to a them turn out to be zeros,” this fund-of-funds quarter of last year saw 31 acquisitions done at
single sector. Still other investors welcome a manager said. a dollar volume of $14.6 billion.
dedicated consumer-focused fund. Marc der Restaurant operator Buffets Inc., which Although the pace slowed during the third quar-
Kinderen, co-founder of 747 Capital, a fund-of- Sentinel Capital Partners and CI Capital ter with 26 deals, investors say that demand
funds manager focused exclusively on small Partners bought in 2000 for $643 million, ran for healthy growth-oriented companies still
buyout and growth funds, said that his firm pre- into troubles and eventually filed for Chapter outstrips supply, pushing up valuations. “Clean
fers to back a consumer-focused vehicle over a 11 protection in early 2008. Other bankrupt- companies, where there’s no obvious prob-
generalist fund that invests in the space. cies include the Black Angus Steakhouse lem, are trading for prices I’ve never seen,”
“We’ve noticed that everyone thinks they can chain, backed by Versa Capital Management, said Heravi.
do consumer deals, but it’s not as easy as it which filed for bankruptcy in 2009, and Castle A quality business can command valuations
seems,” he said. “Distribution is complicated. Harlan’s Perkins & Marie Callender’s Inc., which ranging to as much as eight- to 10-times earn-
How do you get the product into Walmart? plans to exit Chapter 11 with backing from ings before interest, taxes, depreciation and
How do you make sure you deliver on time? Wayzata Investment Partners. amortization, according to Glenn Gurtcheff,
It sounds so easy, but so much can go wrong.” A Pricey Sector head of Harris Williams & Co.’s consumer group.
Plenty of firms took their share of hits in the Private equity firms continue to put money to “We’re not surprised by a double-digit to low-
space during the recent recession, and LPs work into consumer and retail deals, driving up teens multiple for a great company; however,
haven’t forgotten. Investors are starting to valuations for quality assets, even if the pace of six- to eight-times adjusted Ebitda is more
look at how much of the portfolio is staples new deals has slowed more recently. Financial the norm,” said Ramsey Goodrich, manag-
and is defensible, said one fund-of-funds man- sponsor-backed acquisitions of consumer and ing director at investment banking firm Carter
ager. Restaurants seemed to be one niche that retail companies numbered 33 in the second Morse & Mathias.
concerns LPs. “If you look at the mortality rate quarter, totaling $4.2 billion, according to data
Valuations are strong for companies target-
for restaurant deals in general, about half of provider Dealogic. A rush of deals in the fourth
ing either discount brands or what are termed



“aspirational” brands, which carry a higher been food and beverage, followed by retail and strategy, getting pricing right, and trade promo-
price point but aren’t quite defined as luxury. restaurants, said Gurtcheff. “People never used tion spend management in order to drive value.
The market hasn’t been so friendly to com- to think it was high growth, but the demand side On the growth side, some companies have
panies in the middle of the pricing spectrum, doesn’t change either,” he said. “All of a sudden, taken chances to ensure they net market share
said Goodrich. what didn’t look so sexy might look a little from competitors. In 2009, in the midst of the
Aspirational brands have net plenty of atten- more sexy.” recession, Hudson Clothing LLC, a premium
tion from private equity of late; premium denim Occupy Wallet denim brand backed by Fireman Capital, came
jeans company J Brand Inc. sold a majority With niches that are indeed still active, private out with a $1,000 jean called Resurrection,
stake to Star Avenue Capital LLC, a consumer equity portfolio companies will need to fight hard made from scraps of old denim. It was part of
growth-equity vehicle launched with Creative for those consumer dollars that are being spent. the launch of a higher price-point collection
Artists Agency and Irving Place Capital, last “People think of the 1% and the 99%, but I really and sold out at Barneys New York, said Dan
year. Sun Capital Partners-backed Kellwood look at the 9% and the 91%,” said Jeff Edelman, Fireman, managing partner at the firm.
Co. added Scotch & Soda BV, a Dutch apparel director of retail and consumer advisory ser- “All the other denim businesses were coming
business, this summer. vices at McGladrey & Pullen LLP. up with their ‘recession collection,’ going to a
At the opposite end of the spectrum, Ares Private equity’s battle for consumer dollars has lower price point, but Hudson decided to build
Management and the Canada Pension Plan pushed firms to take a hard look at how to drive up its brand,” he said. Hudson experienced an
Investment Board agreed to acquire 99¢ Only growth. At a recent conference, AJ Brohinsky, increase of 45% to 50% in sales over the course
Stores Inc. in an October deal valuing the com- senior director at KKR Capstone, said that two- of this past year.
pany’s equity at roughly $1.6 billion. Lincolnshire thirds of his firm’s work with consumer portfolio But firms must also take care not to grow too
Management picked up Phoenix Brands, a roll- companies involves the addressing of pricing. quickly, investors say. It’s not just stretching
up of budget household-care brands, in March. The firm tends to invest in mature brands, and supply chains, but some companies end up
Currently, the most active subsectors have will “bring a playbook” to things like product overdoing channel growth – suddenly, earlier



Top Five Buyout Deals for US Targets

than expected, loyal customers are dissatis- about how long that opportunity will last. conference. She added that its Global Nutrition
fied with the product’s presence at Walmart or Strategic acquirers have been ideal targets for Group is looking to invest in fruits, vegetables,
Target. “People forget that there’s good growth private equity exits with companies such as grains and dairy.
and bad growth,” said John Kenney, a TSG Nestle SA and Sara Lee Corp. all stepping up Starbucks Corp., meanwhile, has recently put
managing director. to buy private equity-backed consumer busi- itself on the map as a potential acquirer of pri-
Strategics Step Up nesses over the past 12 months. vate equity-backed properties. The coffee giant
Once they’ve garnered that all-too-precious “Even though the environment is uncer- bought Evolution Fresh, a natural juice busi-
market share, private equity firms expect to tain, we are extremely active in M&A, and are ness backed by Fireman Capital, for $30 million
turn to a community of strategic buyers to exit entering into new categories,” Melissa Bailey, as part of its efforts to market healthier prod-
their deals, although there’s some question head of M&A at PepsiCo Inc., said at a recent ucts. The move has some industry observers



Select Consumer-Focused Firms Raising Funds in 2011/2012



wondering if similar private equity-backed next year to 18 months remains to be seen. An
consumer goods products will be of interest uncertain housing market and slow job growth
to Starbucks, including VMG Partners-backed makes it tough to say exactly when consumer
KIND LLC, the fruit-and-nut granola bar already confidence will stage a significant comeback.
distributed in its stores. In some cases, however, But private equity investors contend that these
strategic acquirers are acting as competitors to macroeconomic drivers don’t necessarily dic-
PE firms by investing directly in small, high- tate where they will invest next.
growth consumer product and food and
“We’ve always been more micro than macro,”
beverage companies.
said Josh Lutzker, managing director at Boston-
PepsiCo, for example, acquired a minor- based Berkshire Partners, which early last year
ity stake in coconut water drink One Natural sold makeup company Bare Escentuals Inc. to
Experience, alongside Catterton Partners, in Japanese cosmetics giant Shiseido Inc.. “You
2009. It increased its stake to a majority inter- can invest in a category that has pretty modest
est through a follow-on investment, buying part overall category growth, but if you identify lead-
of Catterton’s interest. “More recently we have ers and the emerging players, you can generate
had some more venture-like investments – we really exciting returns.”
are trying to find the ‘wow’ brands, and have
had discussions about setting up our corporate –With reporting by Laura Kreutzer
venture cap group,” said PepsiCo’s Bailey.

The Consumer’s Cloudy Crystal Ball
Exactly how all of the private equity inter-
est in the consumer space plays out over the



GP MANAGEMENT UPDATE

PE Bonuses Rise in 2011 Amid Bonus season is just around the corner “The turbulence in the public markets isn’t
Long-Term Pressure on Pay and unlike some other corners of the finance causing trepidation among limited partners”
industry, many private equity professionals who are investing in private equity funds, Korb
By Mohammed Aly Sergie
have reason to celebrate. said, which is driving compensation higher.
December 2011
Most private equity firms award bonuses, which Korb added that he expects compensation to

make up more than half of annual compensa- continue to improve for another two years until

tion for associates and principals, in December pay reaches 2007 levels, after which he expects

and January, according to the 2012 edition of it to then taper off and mirror the inflation rate

the Dow Jones Private Equity Analyst-Glocap or growth in the gross domestic product.

Compensation Study, a research report jointly “Something really big needs to happen” to sur-
produced by Dow Jones & Co. and New York- pass the 2007 equilibrium point, such as large
based executive recruiter Glocap Search LLC. flows of new capital from sovereign wealth
This year buyout executives can expect to see funds or outstanding performance from exist-
average bonuses rise by half a percentage ing investments, Korb said.
point for senior ranking partners to anywhere The average base pay is expected to remain
between 1% and 3% for junior and mid-level steady in 2011, according to the report, with
professionals, according to the report. the increase in compensation coming almost
Improvement in overall private equity fund- entirely from bonuses. Principals expect to
raising has given bonuses a lift and marks an earn an average bonus of $345,000 this year,
ongoing turnaround from 2008 and 2009 when up $10,000 from a year earlier. Senior associ-
“bonuses took a hit,” according to Brian Korb, ates, meanwhile, will bring in an average bonus of
partner and head of strategy at Glocap. $165,000 in 2011, a $3,000 increase compared



to last year’s bonus. private equity practice at recruiting firm Korn/
Bonus Gains
Although private equity’s compensation model Ferry International. Average anticipated bonus payouts for 2011/12
by individual positionsat buyout and growth-equity firms
tends to be steadier than Wall Street’s more Healy said a few “factors will lower remunera-
volatile bonus system, some firms have tried tion in the private equity business” in the long
to borrow an investment banking formula that term, including a reduction of management fee
ASSOCIATES $105,000
helps differentiate between star performers income from smaller fund sizes; a shift in how
while keeping pay comparable for employees in firms share fees with limited partners, which SEN. $165,000
ASSOCIATES
the same class. affects bonus pools; and pressure on manage-
ment fee percentages, especially as funds move VICE $249,000
Under this structure, base salaries are uniform PRESIDENTS
across a class of associates or vice presidents, past their investment periods.
PRINCIPALS $345,000
but a variable bonus takes into account indi- Dealmakers at firms that haven’t been able to
50-74%
vidual or team performance. This rewards raise a new fund will start to see steep declines
PARTNERS $1.01 MILLION
executives that work in certain hot sectors pro- in compensation soon, Healy said, as the firms
ducing outsize returns, Korb said. slowly close down shop. “The industry isn’t 1-10
Source: Glocap Search LLC
The slow, steady growth in private equity com- going away, but it’s a story of some firms win-

pensation contrasts starkly to the volatile ning and some firms losing, so it’s hard to make

swings in investment banking bonuses, which a broad generalization,” he added.

are expected to shrink by 30% this year, accord-
ing to The Wall Street Journal. But recovery in
private equity’s compensation model faces
pressure and won’t last for long, said Joseph T.
Healy, senior client partner and co-head of the



RISING STAR

Patience Pays Off For Friedman Friedman Fleischer & Lowe’s Chris Masto is not Only 29-years old when he helped co-found
Fleischer & Lowe’s Masto a man who gets easily riled. Friedman Fleischer back in 1997, Masto’s easy

But in May 2010, the young partner’s patience going manner and persistence have been
By Laura Kreutzer
was put the test while negotiating an add-on helpful both in landing deals and in recruiting
December 2011
acquisition in Canada for Speedy Cash Holdings management talent to portfolio companies,

Inc., a Wichita, Kan.-based specialty lender the according to Friedman. Perhaps the deal that

firm bought back in 2008. has defined Masto’s career thus far has been
the one for mattress company Tempur-Pedic
“The company had an eccentric entrepreneur-
International Inc. Back in 2002, when the com-
ial owner and some complex family dynamics.
pany’s Swedish entrepreneurs wanted to sell
It literally took Chris a year to get that deal
down some of their roughly 80% ownership
done and even [he] showed some exasperation
stake, Friedman Fleischer saw an opportunity.
from time to time,” said Friedman Fleischer co-
founder Tully Friedman. However, a month into the negotiations, a co-
investor got cold feet, leaving Masto with the
Nonetheless, Speedy Cash Holdings ultimately
task of convincing the sellers his firm could still
closed the deal in May 2011, thanks partly to
get the deal done.
Masto’s patience and persistence, two char-
acteristics that his colleagues and Friedman Friedman Fleischer quickly brought in Boston-

Fleischer’s limited partners say the 44-year old based TA Associates and together the two

partner possesses in abundance. “Unlike me, firms invested some $150 million in equity into

he never gets irritated or [at least] never shows the $350 million deal. They also recruited a new

it,” said Friedman. “It’s nice to have someone management team and helped the mattress

around who’s completely unflappable.” manufacturer alter its distribution model.



“The company was sold mainly through info- of the potential of Tempur-Pedic,” Sarvary said. CHRIS MASTO
mercials and specialty stores like Brookstone,” “He’s a very eloquent and compelling presenter.”
said Masto, “and we felt that if they wanted The same combination of enthusiasm and
to be successful, they needed to sell through intelligence has also helped Masto earn
mainstream mattress retailers.” Friedman’s trust.
Between 2002 and late 2005, Tempur-Pedic “My basic standard for evaluating everyone [is]
grew its sales from $260 million to $837 million. ‘Could they run a corner grocery store?’ which
Friedman Fleischer took the company public is actually very hard if you think of all the things
in December 2003 and over time sold down you have to do,” said Friedman. “And the other Career Path
its stake, completely exiting the business in thing is, ‘Would you trust your kids with him?’ Masto helped launch Friedman Fleischer &
2006 and returning around 10-times the firm’s He would pass with flying colors on both those Lowe in 1997 at age 29, after working as a
original investment. tests, and most politicians would fail to pass on management consultant for Bain & Co. He
But that wasn’t the end of the relationship. one or both of those.” started his investment career as a financial ana-
lyst in the corporate finance department
Masto remained on the company’s board
of Morgan Stanley & Co.
and in March 2008 when stock prices began
Education
to languish, convinced his firm to reinvest in
Sc.B. in electrical engineering from Brown
the now-public Tempur-Pedic via a common
University, M.B.A from Harvard Business School
stock purchase.
Board Seats
In June 2008, Masto once again recruited a new Tempur-Pedic International Inc., Speedy Cash
management team, bringing Mark Sarvary on Holdings Corp. and TriTech Holdings Inc.
board as Tempur-Pedic’s new chief executive.

“He was the one that painted the picture for me


From Private Equity News

CEE BUYOUT EXECS HOLD THEIR BREATH

Fears about the eurozone crisis As the festive season approaches, executives with western Europe which has been the hall-
are rising in neighbouring central focused on central and eastern Europe are mark of the region as part of its catch-up with
and eastern Europe cheery about their market, citing growth, a high core Europe. That is good news.”
level of interest in the region and even some Dawid Sukacz, a managing partner at Polish
By Jennifer Bollen
“good news”. But the outlook for the New Year private equity firm Concordia 21, added the
12 December 2011
looks less bright, with fears rising that the euro- macroeconomic factors in Poland were largely
zone crisis will further damage deal activity. positive. He said: “For Poland, no major changes
The confidence in CEE comes despite the grow- have happened. There are still a lot of players
ing pressure of the eurozone crisis in the region’s looking for transactions.”
neighbouring west. Last week, reports said the Poland’s GDP rise is forecast as 3% next year,
European Central Bank was preparing a €1 tril- down slightly from 3.8% this year, according to
lion rescue package, which a research note from the International Monetary Fund. Meanwhile,
Deutsche Bank said would pave the way for a Russia’s is forecast as 4.1% next year, Romania’s
“colossal market intervention” in the European 3.5% and Lithuania’s 3.4%, although its GDP
sovereign bond market. for this year was forecast as 6%. The forecasts
Thierry Baudon, managing partner of Mid compare favourably with more pessimistic out-
Europa Partners, said there was hope for some looks for western European economies – the
of the key countries in the region, which he UK’s GDP is forecast as 1.6% next year, France’s
identified as Poland, the Czech Republic and 1.4% and Italy’s 0.3%.
Slovakia. He said: “Despite all of this uncertainty Baudon said one of the main factors contribut-
and chaos, the region is still growing and has ing to economic strength in CEE was the region’s
maintained the structural growth differential manufacturing sector, which he said continued



to create jobs and attract foreign investment. He with 10 in the previous quarter and 11 in the first. executives remain concerned about the impact
added companies increasingly transferred man- In the third quarter of last year, firms agreed of the eurozone crisis.
ufacturing from western to eastern Europe while 17 deals. Marcus Svedberg, chief economist at invest-
Asian businesses were moving plants from local Deals completed in the third quarter include ment manager East Capital, said in a statement
operations to central Europe for logistic reasons. buyout firm Advent International’s acquisitions last week that eastern Europe could grow as long
Hope for steady deal flow of manufacturers TES Vsetin and MezServis a there was no deep recession in the eurozone.
At the same time some firms are expecting to from Czech firm Penta Investments, both agreed He said: “We do not believe in decoupling in gen-
take advantage of low prices on offer. Sukacz in May. The terms were undisclosed but Advent’s eral and particularly not in eastern Europe.”
said firms were increasingly on the lookout for €1bn central and eastern Europe-focused fund He outlined three broad risks facing the region
take-privates following significant falls in valu- typically invests between €35m to €100m of next year – dependence on external sources of
ations. He said: “More and more people are equity per deal. growth, substantial economic imbalances and
looking for potential public-to-private transac- Also in the third quarter, listed private equity domestic political turmoil – and said eastern
tions, especially in Poland. The market has been house CapMan and Belgian-based investment Europe would be characterised by an economic
historically quieter and a large number of com- company Gimv completed their joint invest- slowdown and market recovery next year.
panies have been listed. The valuations are going ment in photo services provider Expert Photo, a Last month the IMF said in a statement it had
down and in the future there is some potential in growth capital deal they agreed in July. received a request from the Hungarian authori-
that space.”
In October, Mid Europa completed its acquisition ties for possible financial assistance and
Deal valuations in the region are largely unknown of a 65% stake in hospital operator Kent Hospital Christine Lagarde, managing director of the
in the third quarter but deal volume has been Group. The firm also agreed to increase its stake IMF, outlined priorities for Russia after meet-
more or less in line with recent quarterly trends. to up to 90% over time. ing Russian officials including President Dmitry
According to data provider Dealogic, firms Medvedev to discuss the challenges facing
Fears over neighbours
agreed 15 deals in the third quarter, compared emerging Europe.
However, despite confidence in the region itself,



Baudon said his main concern was local banks’ the lowest raised in the first three quarters over
strong ties to western European institutions, the past five years.
which he highlighted owned a large proportion of Meanwhile, firms are competing to raise 102
banks in CEE. He said: “With everything going on funds targeting an aggregate €14.3bn, the big-
in western Europe, banks fundamentally need gest of which is a $1.5bn buyout fund managed
to reduce balance sheets. Availability of financ- by Avangard Asset Management. Akina is rais-
ing for consumers and private equity in central ing the second-largest, a €720m fund of funds,
Europe could become seriously constrained. while Switzerland-based LGT Capital Partners is
This has not happened yet, but it looks like debt raising the third-largest, a €600m fund of funds.
quantums have been dropping over the last few
However, in October, central and eastern Europe-
weeks.” He expected the growing crisis in west-
focused buyout firm Abris Capital Partners
ern Europe to lead to a fall in deal volume, saying:
provided some positive news for the region when
“There could always be opportunities that buck
it raised almost half of its latest fund in a matter
the trend but logically there should be fewer
of months after strong demand from investors
deals because there should be fewer sellers.”
for exposure to the region.
Tough competition in a stagnant funds market
The firm had raised €210m of its targeted
Fundraising by central and eastern Europe-
€450m in a first close following the launch
based firms slumped by the third quarter. Data
of the process in June, according to a person
provider Preqin said firms raised €2.8bn across
familiar with the situation. The source said the
18 vehicles in the first three quarters, the lowest
relatively quick nature of fundraising amid a dif-
in the first three quarters of any year over the
ficult market environment reflected investors’
past five years. The number of funds was also
appetite for deals in the CEE region.



GIC MULLS SALE OF $1BN SECONDARIES INTERESTS
By Kiel Porter GIC is the latest in a string of banks and finan- CDC’s fund interest portfolios, worth a combined
05 December 2011 cial institutions worldwide to dispose of private $500m, are now “very advanced”, according to
equity assets as they seek to comply with two people familiar with the situation.
tougher capital requirements and generate Private equity accounts for about 10% of GIC’s
Sovereign wealth fund the Government of
early liquidity. In the 12 months to June this year, asset allocation, alongside infrastructure invest-
Singapore Investment Corporation has begun
$16.1bn of secondaries deals were signed glob- ments, according to its annual report for the year
discussions over the possible sale of a portfo-
ally, 15% up on the same period last year when to March. The group has not disclosed the size
lio of private equity fund interests which could
$14bn worth of deals were signed, according to of its assets under management but has been
total $1bn, according to two people familiar with
UBS data. widely cited as having about $200bn, giving it a
the matter.
Last week it was reported that the French bank commitment to private equity of $20bn.
GIC, which manages private equity through
BNP Paribas was in the process of selling a In addition to backing third party managers,
its subsidiary GIC Special Investments, has
legacy portfolio of private equity fund interests GIC invests directly, completing large-cap and
engaged intermediaries to handle the sale pro-
it inherited when it purchased the Belgian bank small-cap buyouts alongside mezzanine debt,
cess according to the sources.
Fortis in 2009. The assets – which comprise distressed debt and secondary fund deals.
The contents of the portfolio are currently direct investments and co-investments in small The group was previously reported to have
unknown, however one person with knowledge and mid-sized companies as well as stakes in pri- submitted a joint bid alongside the Canadian
of the matter said that they were likely to be private equity funds – have a guide price of $700m. pension fund Caisse de Dépôt et Placement du
marily US fund interests with a minimum value UBS is handling the sale process. Quebec for the private equity arm of insurance
of $500m, potentially rising depending on the
A range of banks including Citigroup, Bank of group Axa.
level of interest. GIC has investments in funds
America Merrill Lynch, Barclays Bank and HSH
managed by several of the private equity indus-
Nordbank have sold private equity assets over
try’s largest houses including Blackstone Group
the past 18 months, while the sale of WestLB and
and Apax Partners.



UK INNOVATION FUND BECOMES A JUMBO FLOP

The government’s flagship private As the world economy moved from a state of had fallen well short of the proposed £1bn target
equity fund quietly fell short in its credit constraint to full-blooded recession in early having raised just £5m in third-party capital
bid to attract third-party investors 2009, the UK’s governing Labour Party moved at the final close. Even in a difficult fundraising
away from the laissez faire position to industry it environment the figures represented a huge dis-
By Kiel Porter
had adopted over much of the previous decade appointment, with one European investor calling
05 December 2011
to something more proactive and interventionist. it “a categorical failure by all parties involved”.

A number of initiatives were introduced, including So where did it all go wrong?

the Strategic Investment Fund, aimed at directly Promising start
supported manufacturing, and more capital for Following the June 2009 announcement of the
the export-focused government department, fund, further details of how it would be struc-
United Kingdom Trade & Investment. tured began to emerge.

A key plank of this was the UKIIF, a scheme The Department of Business, Innovation and
launched in June 2009 to attract £1bn in private Skills, advised by David Quysner, the former
sector investment using state funds as seed cap- chairman of the British Private Equity and
ital in a private equity fund structure. The fund Venture Capital Association and an executive of
was hailed by UK Prime Minister Gordon Brown private equity investor 3i Group, took the deci-
as providing the ability to “foster early-stage sion that two funds – covering the technology
technology businesses with real potential”. and environmental sectors, respectively – would

However, this summer, following a change of be created with the government mandating two

government in May 2010 when a Conservative- private sector managers to run the ventures.

led coalition with the Liberal Democrats on The funds would operate on a fund of funds basis
board took the helm, it transpired that the fund rather than directly investing, with both the state



and the mandated manager providing capital and The summit attracted the interest of key players January 2010 and the EIF the following month.
the manager then soliciting commitments from in both the investor and fund manager commu- The Hermes Environmental Innovation Fund
third-party investors in order to reach the target. nity. Government records show that among the held a first close of £125m with a £50m com-
The process for selecting the managers began audience were representatives from Aviva, Axa, mitment from the government and £75m from
in July 2009, according to a person close to the BP, Greater Manchester Pension Fund, RailPen Hermes’ parent, the BT pension scheme. The
Department of Business, Innovation and Skills. Investments, Standard Life, West Midlands EIF’s Future Technologies Fund held a first close

An investor “summit” was then held in November Pension Fund, Abingworth, Advent, Albion, of £200m with funding coming equally from the

2009 for interested parties, with government Amadeus, Capital Dynamics, Hermes, MTI and government and EIF.

minister Lord Paul Drayson, a science minis- Pantheon Ventures. The closes were met with great fanfare by the
ter at the Department of Business, Innovation A number of these attendees, including private Labour government and private sector alike with
and Skills, keen to explain the funds’ aims equity firms Pantheon and Capital Dynamics, Lewis Chong, counsel at law firm O’Melveny &
and emphasise that while there would be a had also bid for the mandate to manage the Myers, echoing government sentiment that “the
state element to the funds the UKIIF was funds. However, in December 2009, the gov- parties did well to get a close so quickly”. Further
intended to be “fundamentally a hard-nosed ernment announced that the investment arm of announcements on subsequent closes by both
commercial proposition”. the BT pension scheme, Hermes, and the fund funds were expected by the end of 2010 but

Drayson said: “UKIIF will be a fund of funds that subsidiary of multilateral lender the European aside from mentions of commitments to manag-

will invest in the top-quartile performing tech Investment Bank, the European Investment ers being made, little information on the funds’

funds in the UK and Europe. It will have a spread Fund, had won the mandates for the environ- progress was provided.

across a number of specialist funds and a ment and technology funds respectively. Lack of interest
portfolio of investments in high-growth compa- The two funds moved swiftly to announce first Instead, the two funds quietly held their final
nies. It will have a ruthless focus on achieving a closes – the point at which a fund can begin closes over the summer of 2011 with a spokes-
strong return.” investing – with Hermes holding a first close in man for Hermes confirming that it had managed



to attract just £5m in third party commitments funds still have significant capital to deploy and targets to SMEs.
while a spokesman for the EIF confirmed it both have been actively investing. The EIF has The BGF will be seeded with £300m from five UK
had failed to garner any outside capital. One made commitments to a number of managers banks – Barclays, HSBC, Lloyds Banking Group,
European investor said that the UKIIF funds including the Munich-based firm Acton Capital Royal Bank of Scotland and Standard Chartered
“didn’t provide anything I couldn’t find elsewhere Partners and Netherlands buyout firm Gilde – with the aim of taking minority stakes of
with far less restrictive investment criteria”. Healthcare Partners. between £2m and £10m in up 20 to SMEs with
The consensus view from investors was that the Hermes, meanwhile, is understood to be an turnover of up to £100m. Should these initial
UKIIF funds were too restrictive in their investment investor in the latest renewable energy funds of investments be deemed a success the banks
criteria when weighed against other managers’ UK-based private equity investor HgCapital and have the option of increasing the size of their
fundraising that targeted the same sector. Zouk Ventures, according to a person familiar total commitment to the BGF to £2.5bn.

Both funds had to invest 50% of their capital in with the situation. The new enterprise was launched in April 2011
UK-based managers while co-investments were The next big idea with the former CCMP Capital partner Stephen
also limited, according to three people familiar The new UK administration has also been keen Welton becoming chief executive and the former
with the situation. to increase the provision of equity capital to head of industrial company Williams, Sir Nigel

The EIF and Hermes declined to comment on businesses. However, unlike with UKIIF, the new Rudd, becoming chairman. The BGF has made

the fundraising besides confirming totals, while coalition government chose to pressure the two investments – in online business out-

a spokesman for the Department of Business, banking sector to fund the endeavour. sourcing firm Benefex and travel management

Innovation and Skills said that the £1bn figure The Business Growth Fund was established in company Statesman Travel Group – worth a

trumpeted in 2009 was an “aspirational target” July last year to provide growth capital for small combined £8m, while extensively hiring in an

while the £330m raised makes the UKIIF “one of and medium sized businesses. It was born out effort to build a regional network in addition to

the largest technology fund of funds in Europe”. of Project Merlin, discussions between the gov- its Birmingham headquarters.

While the fundraising targets were not met, the ernment and the UK’s largest banks over lending


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