British Private Equity is Losing out to American Firms such as KKR's Henry Kravis and Blackstone's Stephen Schwarzman.

1. BRITAIN'S PRIVATE
EQUITY TITANS HAVE
TUMBLED
The British 'masters of the universe’ are losing out to
their American private equity cousins (Such as KKR
whose co-founders are Henry Kravis and George R
Roberts and Blackstone whose co-founders are Stephen
Schwarzman and Peter Peterson) as global markets
contract.

2. They used to be the Titans of European private equity: masters of the universe.
Whisper it quietly, but with returns dwindling and investors out of pocket, too many of Britain’s
private equity giants are looking like shadows of their former selves, unable to compete against
their American rivals.
The buy-out kings of old – whether Damon Buffini at Permira or Sir Ronald Cohen at Apax –
are no longer the driving forces of the industry. Or even at the firms they used to run.
Meanwhile, a new generation of wannabe kingpins is struggling to make an impact at a time
when investors have tired of paying high fees for low growth in a stagnant economy.
Worldwide, private equity manages $3 trillion (£1.9 trillion) of assets, but five years on from the
financial crisis, most private equity houses are scratching at the bottom of their funding barrels.
They are off on new fundraising missions, wooing endowment funds, pension funds and
sovereign wealth players, asking for more money to start buying new companies.
According to research from Prequin, 429 European firms are currently in the market hoping to
raise a record-breaking €129.6bn (£109.3bn).
So far, they have collected €14.5bn – compared with the €127.8bn raised at the height of
2007’s buy-out boom.

3. What’s more, Prequin claims that European firms have seen more fundraising setbacks than
their US rivals, with a high number of buy-out firms falling short of their targets.
In the US, where the mouthwatering $100m-plus dividends taken out by the likes of
Blackstone’s Stephen Schwarzman or KKR’s Henry Kravis are still making headlines, large
firms have learnt to diversify. Blackstone and KKR are now investing in debt and real estate
and have extensive capital market and hedge fund operations alongside their private equity. It
makes them more resilient to changes in the investment cycle and institutionalizes their brand
names.
By contrast, generalist large-cap UK funds have fallen out of fashion.
Apax has been wooing investors since 2011 with ambitions to raise €9bn. But, just as it started
knocking on investors’ doors, many of its deals began to sour. Marken, the medical equivalent
of DHL, was wrestled away by lenders last year, costing Apax £390m, while many believe the
same fate awaits GHG, Britain’s largest private hospitals group, which faces a restructuring by
lenders, owed £2.3bn. The operating arm of GHG, which is separate from its property division,
continues to trade profitably.
Cengage Learning, the educational publisher and one of Apax’s biggest investments, is also
laden with $5.4bn of debt inherited from its 2007 leveraged buy-out. Apax has already written
down the company’s value to just 10pc of its original price and restructuring advisers have
been brought in.
“Too many deals have gone wrong too quickly,” says a source close to Apax.

4. Investors paid the firm to be experts at due diligence, the source adds, but the “wheels came
off just months after many of the companies were acquired”.
Apax’s previous buy-out fund, the €11.2bn 2007 fund, in which Cengage sits, was marked at
just 1.1 times its investment cost and yielded 3.28pc after fees, as of June 30, 2012, according
to the Washington State Investment Board, an Apax investor.
One of its stand-out investments was fashion brand Tommy Hilfiger, which quadrupled Apax’s
original investment when sold in 2010, booking a massive €1.2bn return. But some insiders
claim people have been “dining out on Tommy for too long”.
Last month, Apax held its “first close” – the halfway point in the fundraising cycle, when private
equity firms have traditionally been promised more than 75pc of their funds. Apax clocked
€4.3bn in investor commitments, €1bn from its sovereign wealth backers, including
Singapore’s GIC, and another €500m from the partners themselves, helping to create one of
the biggest first closes since the credit crunch. More than 300 investors are thought to have
combed through Apax’s books trying to decide whether to invest.
However, the fundraising remains a long way short of 2007, when Apax had to fight off frenzied
investors eager to hand over cash. Back then, it took less than a year to raise €11.2bn. This
time, the firm will have been on the road for two years before it closes its order book.
Internal differences haven’t helped. Some 31 out of Apax’s 50 2007-era partners have left, a
high tally for almost any industry, let alone one created on the basis of long-term investment
profiles. Over the same period, the firm has replaced the heads of all five of its sector teams.

5. Retail and consumer head Alex Fortescue is one example; he earned Apax an estimated
€1.2bn on a total initial investment of around €800m, but is now the lead investment officer at
Electra Partners.
There is also jostling over who will eventually succeed Martin Halusa, Cohen’s successor. As
The Sunday Telegraph reports today, as part of the fundraising process, Halusa has now
committed to stay with the firm for three years amid concerns he may have been on his way
out.
When the time does come, however, some point to Michael Phillips, who heads Apax’s Munich
office and with whom Halusa is said to have a close alliance. The well-liked technology and
telecoms specialist Andrew Sillitoe is perhaps a safer bet, while Mitch Truwit and Christian
Stahl are perhaps the other likely contenders.
The fact remains that, whoever leads Apax long-term, the firm will have to make some
dramatic changes as it recalculates its operating strategy in a world where its latest fund has
shrunk from a hoped-for €9bn to an expected €6bn.
Its opulent head office, straddling five glass floors in London’s Jermyn Street, is a reminder of
its ambition to be recognized as an international powerhouse. But already, two floors will have
to be sub-let, with more retrenchment potentially on the cards.
Eleven investment staff have lost their jobs, the Madrid and Milan offices have been closed
and there could be further job losses once the fundraising has closed.

6. “Part of the problem is that old-school UK firms are just finding it harder,” said a UK-based
private equity managing partner. “They were very good when they did £500m deals. Then the
leverage got bigger, so the deals got bigger and bigger. And so did the funds. People became
used to making money just by selling companies on higher multiples and loading them with
debt.”
“The issue is both size and competition. The market has changed and firms have to do a lot
more to win support,” said a senior banker.
Meanwhile, those close to Permira, which owns companies such as Birds Eye Iglo and New
Look – jointly with Apax – are keen to put some white space between themselves and Apax.
Permira has been through the wars, but now feels it has a recovery story to tell. It was one of
the first firms hit after the financial crisis when its stock-market feeder fund, SVG, had to
publicly take back almost half its investment into Permira IV. That meant scaling back 2009
ambitions for an €11bn fund.
But four years later, Permira has been forced to repeat the trick. This time, the firm started
fundraising €6.5bn before revising down to €4bn, with industry sources now speculating the
firm might not even reach €3bn.
However, a first close above €2bn is imminent and those sources close to the firm say Permira
is confident that it will reach its goal of €4bn to €5bn.
Nevertheless, Permira’s investors say they have openly questioned the firm over what would
happen if it failed to meet its target. “There are strategies for how different scenarios would
look and what would happen to the firm,” said one investor, who is very supportive of Permira.

7. But others question the level of restructuring needed if the fund were scaled down so
significantly.
“If it goes to a €2bn or €3bn fund, it will be a bloodbath,” said an insider, noting that Permira
has always had a much bigger workforce than rivals such as Charterhouse.
“There will be huge implications for the shape, strategy and maybe even its survival in its
current form,” added a Permira IV investor.
“Can Permira remain a global firm with just midcap money? Will partners take a cut in
compensation?” asked another insider.
Yet the troubled Permira IV fund has recovered quite well. Businesses such as Hugo Boss,
which looked like they could be on the verge of collapse in 2010, have helped contribute to an
11pc increase in earnings across the portfolio. Valuations have gone up 26pc in the past year
alone, with €3.4bn handed back to investors.
“The operating businesses and the capital structures of all the portfolio companies are in very
good financial health,” said an insider, who was echoed by an investor who said Permira had
learnt many lessons from the financial crisis.
But there are still complaints that not enough profit has been wrung out of investments, such
as electronics group Freescale, media group ProSieben, or the Macau casino operator Galaxy
– although even a sceptic would have to accept that Macau did return €1.1bn.

8. Over its lifetime, Permira has achieved a two-times return, a reasonable, but not a stand-out,
result. Permira IV currently represents a 1.4 times return, though the net internal rate of return
stands at 24pc, which, say sources, is in the top quartile of firms.
“It is a question of where your money will return the most,” said one US investor who praised
rivals such as CVC, Advent and EQT, which he said were “much more in fashion at the
moment”.
Permira’s management fees add up to €200m a year. About €80m to €100m is spent on office
costs and infrastructure, with the remaining €100m split mostly between 25 partners in salary.
The €100m comes in addition to the main way private equity executives get paid, which is
through “carried interest” – a type of commission paid from the profits handed back to
investors. Across the entire industry, pension funds and endowment fund managers are
pushing back on what is seen as a decade of excessive fees creamed off the top of funds that
had grown too big.
The Deloitte 2013 Private Equity report says that investors will be demanding discounting from
the firms, more segregated funds and more direct co-investment opportunities.
“The question is whether the problems facing Permira and Apax are specific to them or the
wider industry?” said an investor.
Sandra Robertson, who heads Oxford University Endowment Management, recently shocked
UK private equity bosses when she told them at an industry conference they had got rich off
other people’s money but had failed to deliver the results to justify their earnings. She warned
that if the industry wants to continue to raise money, it has to prove itself and stop taking
undeserved fees.

9. She also pointed out that over the past decade, private equity has, on average, returned only
8.5pc, despite the ebullient credit markets – barely holding its own against other asset classes,
such as credit or equities.
“You make it so hard for us to invest and you can’t pretend to be exceptional any more,” she
said.
A managing partner at a firm that has already closed a major fund said: “Everyone was a
private equity giant in 2007.
Now, we have to work a lot harder to seem quite so tall.”
Original article here.