Neither-fish-nor-fowl approach actually seems to be working

By Paul Mackintosh - 05/05/14

The resurgence of buyout fund fortunes in the last couple of years has also revived one of the more curious double acts in European private equity (PE): the symbiotic relationship between major UK-based buyout house Permira and its leading investor, FTSE 250-listed SVG Capital, which essentially served as a feeder vehicle to raise capital from the listed markets for investment into Permira and other funds. SVG “invests in private equity and private equity-related assets” with capital from its public markets investors. And this neither-fish-nor-fowl approach actually seems to be working. After cutting back its commitments to Permira in recent years, SVG Capital now is reportedly increasing them again, following stronger performance from Permira fund portfolio assets, and the prospects of similar performance from the subsequent Permira fund.

SVG Capital’s end-April interim management statement covering the first quarter of 2014 reports “significant distributions as the Permira IV investments continue to be realised” as well as “increased pace of calls to finance new investments”. It also records “increased commitment to Permira V – total fund commitment of €125 million (US$173.3 million)”, and more broadly, “the portfolio continues to transition to newer investments: Fifth Cinven Fund, Clayton, Dubilier and Rice IX and Permira V investments represent 6.5% of the gross MBO portfolio (December 31, 2013: 2.5%)”. Concurrently, SVG Capital is issuing a circular to shareholders “with the details of a £50 million (US$84.4 million) tender offer” which “will bring SVG Capital closer to its stated target of returning £300 million to shareholders in the three-year period from February 2013.”

Not everyone is that pleased with SVG Capital’s recent track record. CEO Lynn Fordham has beaten off a series of challenges to her leadership from UK investment peer Coller Capital, which initially opposed SVG moves to broaden its exposure beyond Permira to other firms like Cinven. Ironically, that diversification seems to have come along with steadily improving performance, which led to a 46% share price hike and a robust recovery in NAV as investments in Permira IV, subject to many writedowns post 2008, rebounded. As of end April 2014, SVG Capital reported a market cap of £964.58 million.

"The investment portfolio continues to be cash generative, facilitating the transition towards newer investments”, said SVG in its statement. “The investment team are reviewing a range of new opportunities and we expect to make further new commitments in the coming 12-24 months.”

This may not be the most remunerative or the most convincing model of private equity financing and fund of funds management, but it does seem to be one with surprising staying power. Especially when the buyout asset class that underpins it is staying the course too.