Private equity investment is back at a high level as investors chase yield. Catherine Lafferty looks at some of the most successful fund closures of recent months and what these funds are targeting.
The boom times are back for private equity. Fundraising is at its highest level since the financial crisis as investors search high and low for yield in an era of low rates. It is an environment that will bring its own challenges as well as inevitable rewards.
Steve Langton, managing director, alternatives sector at State Street, says that regulation, along with increased demands for transparency and consistent reporting standards, have certainly been catalysts for change in the private equity industry.
“These factors have undoubtedly increased operational overheads and the barriers to entry, particularly first-time general partners (GPs), which have led some industry practitioners to evaluate their existing business model and question whether it will be sustainable in the future,” he says.
Langton forecasts that with these macro trends set to continue, and increasing investor appetite for the private asset class space, the traditional ‘in-house’ administrative support model may be an area of focus as GPs determine whether this is a core value-added discipline of their business. Alternatively, they could deem it a ‘non-core’ activity, better served by a third-party provider with the experience, infrastructure and resources to address such demands.
A glance at two leading private equity firms provides a snapshot of the state of private equity at the moment.
In late December 2016, US technology specialist Silver Lake began its marketing for Silver Lake Partners V (SLP V). It closed the buyout fund at the $15 billion (€12.6 billion) level, exceeding its $12.5 billion target, in April 2017. The sum included about $500 million from the general partner. The fund invests in large US technology company buyout deals. Its precursor, Silver Lake Partners IV, closed at $10.3 billion in April 2013.
The firm has a long-term orientation and remains strongly focused on its differentiated strategy of global technology investing, which it says positions it to partner with the world’s premier management teams to leverage deep domain expertise, tap extensive industry relationships and drive innovation to achieve long-term value.
Currently, the firm’s portfolio includes technology and technology-enabled businesses such as Alibaba Group, Ancestry, Broadcom Limited, Cast & Crew, Ctrip, Dell Technologies, Fanatics, Global Blue, GoDaddy, Motorola Solutions, Red Ventures, Sabre, SoFi, SolarWinds, Symantec, and WME-IMG.
SLP V boosts Silver Lake’s ability to seek large-scale investment opportunities around the world. The company invests across technology, technology-enabled and related growth industries such as semiconductors, software, cloud computing, transaction processing, IT infrastructure, cyber security, e-commerce and vertical specific technology investments in the energy, healthcare, financial services and media sectors.
Hands-on
Partners Group, the global private markets investment manager, closed its 2016/17 vintage in July this year. It consists of the flagship programme Partners Group Direct Equity 2016, which was capped at €3 billion, together with €3 billion of additional capital committed to direct private equity via client mandates and some other investment programmes. In total, as of June 30, 2017, Partners Group has total assets under management of €57 billion, including €31 billion of private equity assets under management.
Like all private equity investors, Partners Group is a long-term investor with a mandate to actively create value in its investments through hands-on value creation initiatives alongside management teams.
The firm expects to make around 20-30 investments from Partners Group Direct Equity 2016 and typically holds its investments for around four to six years in order to execute a series of value creation initiatives successfully. The fund itself is structured as a typical closed-end private equity fund, with a ten-year life that can be extended by two years.
Returns are the name of the private equity game and Partners Group is targeting a net internal rate of return in the mid-teens for the fund.
The programme will be deployed worldwide on behalf of investors in mid-market and select large-cap companies across a range of industry sectors, including healthcare, education, business services, information technology, industrials and consumer.
The firm says it expects to strike a balance between return maximisation and diversification. Its investment strategy involves identifying transformational growth trends within specific sub-sectors and finding the companies best placed to profit from these trends with the help of an active value-creation strategy.
In August, the fund invested in Key Retirement Group (KRG). Founded in 1998 and headquartered in Preston, Lancashire, KRG is a leading UK provider of independent specialist advice and financial products for individuals approaching or in retirement. The company specialises in the origination and distribution of lifetime mortgages (LTM) on behalf of third-party funders, which enable customers to release equity from their homes to fund their retirement. In 2016, KRG advised around 9,000 customers, providing around £530 million (€600 million) in LTMs.
Andrew Deakin, Partners Group’s managing director, private equity Europe, says KRG is the leading specialist adviser to the pre-retirement and retirement segment in the UK and has demonstrated strong organic growth since its inception. The business has significant scope for further value creation, he adds.
Software specialist
In July, the fund invested in Civica. Founded in 2002 and based in London, the company provides business-critical software and technology-based outsourcing services both to public-sector organisations and to commercial organisations in highly regulated sectors. Its customer base includes local and central government, healthcare providers, housing associations, schools, police and fire services, serving 2,000 major customers in ten countries.
Its software and services support functions range from tax and benefits processing to medical records management and are used by more than two million professionals every day, streamlining the services provided to 100 million people and businesses.
Civica employs approximately 3,700 employees and has offices in the UK and Ireland, Australia, Singapore, India and North America. Partners Group’s managing director, private equity Europe, Bilge Ogut, says the firm was impressed by the firm’s track record of long-term growth. It sees its investment as an opportunity to back a high-quality market leader in a sector with evolving customer needs and the potential to gain scale through select acquisitions.
Local and regional governments everywhere are digitalising their processes to offer more cost-effective and user-friendly services to the public and Civica has the expertise in supporting digitalisation and efficiency gains in the public sector, she notes.
Laboratory tests
In January, the fund invested in Cerba HealthCare, a Paris-based operator of clinical pathology laboratories. The firm, founded in 1967, maintains a number-one position in France and strong market positions in Belgium and Luxembourg. It generates most of its revenues from routine lab tests.
The company also focuses on speciality lab testing for more complex medical diagnoses and testing services for clinical trials. Its clients include private patients, physicians, labs, private and public hospitals, retirement and nursing homes, and pharmaceutical and biotech companies. At the time of the investment, the company employed almost 4,300 people, including 350 biologists. It generated revenues of approximately €630 million in 2016.
Kim Nguyen, managing director, private equity Europe at Partners Group, says Cerba is a resilient market leader in an attractive and fragmented sub-sector of the healthcare industry. Its integrated business model means it is positioned to further consolidate the French market and accelerate organic growth.
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