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A meritocratic boom

By Paul Mackintosh - 29/04/13

How quickly times change. Just last week we had Silver Lake close its latest fund IV at US$10.3 billion on a $7.5 billion announced target, bringing in almost $3 billion of excess interest. Now we have the Financial Times (FT) proclaiming a “shrinking buyout industry” with the news that Permira is just 2.2 billion euros (US$2.86 billion) towards its 4-5 billion euro target on Permira V, already scaled back from 6.5 billion euros and less than half the 11.1 billion euros raised for its 2006 vintage fund, Permira Europe IV. The FT then lines up quotes to confirm that the private equity (PE) industry is contracting and is going to have to adapt to leaner times.

If Silver Lake is anything to go by, though, the buyout industry is clearly shrinking faster in some places rather than in others. Furthermore, as the FT concedes, the Permira IV fund has had a troubled history, with a 60% writedown and cutback to 9.6 billion euros at end 2008. This debacle stemmed partly from collapsing capitalisation at Permira’s listed feeder investor SVG Capital – currently still under pressure from shareholder and leading secondaries firm Coller Capital, which in contrast to Permira, closed its own Coller International Partners VI fund comfortably 10% above target at $5.5 billion in July 2012. SVG reduced its exposure to Permira last autumn, but this has not been enough to stave off activist pressure from Coller. Meanwhile, US firm KPS Capital Partners claims to have fielded up to $9 billion of investor interest in its latest $3.5 billion vehicle.

Signs of an industry where limited partner (LP) investors are more selective and demanding should not be mistaken for evidence of shrinkage. This sounds more like an overdue correction and rebalancing as part of the long tail of consequences from 2008. It also looks like some distinct and separate pressure on the UK and EU firms that grew exponentially prior to the crisis, with ambitions – but without the financial and organisational foundations – to rival their US peers. The rather odd relationship between Permira and SVG underlines how private equity in Europe has never really found the same scale or maturity of institutional backing as in the US – and with corporate valuations and growth expectations dropping across Europe, LPs may see no reason to put their money into reforming that situation now. Silver Lake IV suggests that investors into the asset class have large volumes of capital ready to deploy – but funds are going to have to work a lot harder to show they deserve it.