Mark Spinner (pictured), partner and Head of Private Equity at international law firm Evershed, outlines the significance of Candover’s latest agreement with investors to terminate the EUR 3bn (GBP 2.73bn) buy-out fund it raised last year.
This news is indicative of what is happening in the bigger end of the buy-out market. Traditionally the bigger buy-out funds have relied upon the availability of significant amounts of reasonably cheap debt – debt that is just not available at this time. This makes deals at the top end of the private equity value range much more difficult to structure and close.
Added to the paucity of deal flow, many of the larger buy-out funds are also experiencing liquidity problems within their limited partner base. This is because many of the limited partners have pursued a strategy of over commitment (relying upon distributions to fund future contributions) and/or have sought to leverage their investments and are themselves struggling now as a result of the poor debt markets.
The loss of Candover’s EUR 1bn commitment from its own listed arm in April created a significant problem for the fund as the fund size, and hence its ability to do the larger deals, shrunk overnight. The loss of a large LP means that the overall shape of a private equity fund changes and with concentration limits restricting the amount that can be allocated to a single investment, deal sizes will come down. Once this happens many LP’s will want to reassess their allocation to the fund since typically they will have invested on the basis that the fund would be investing in a specific part (value range) of the market.
This is one of the reasons that many GP’s are working extremely hard with their LP’s to try and avoid a default situation. This often involves avoiding creating a situation where they ask to draw down a commitment unless they are certain that all LP’s will be in a position to fund. Indeed we have seen a deal be pulled because of a lukewarm reaction from key LP’s when the GP discussed the opportunity with them. GP’s are also looking to find new LP’s to take over funded and unfunded commitments of LP’s who either are unable or unwilling to fund future commitments.
Having said all this, private equity remains a very attractive asset class which attracts a relatively small percentage of the total available funds under management. For that reason the traditional sophisticated investors who have invested in private equity over the past 20 years still see this as a temporary blip and indeed many are upping their allocation to take advantage of the current investment cycle.
If history repeats itself, those GP’s/LP’s that invest wisely now will see vintage returns in years to come. Those LP’s that are withdrawing from the private equity sector are typically those that have come to the sector late and have seen considerable write downs on their investments in the last two or three years.
