Timing may not be everything in private equity fundraising. Track record, reputation, attractive terms and sheer dogged persistence all have a role to play. But luck and timing most certainly help.
When British buyout heavyweight BC Partners Ltd. was raising its €6.5 billion ($8.2 billion) ninth fund, starting in the fall of 2010, its track record seemed to be working in its favor. For much of the previous year, in the midst of the credit crunch, it had been one of the most active private equity players on either side of the Atlantic, making acquisitions such as Dallas-based post-high-school training center operator ATI Enterprises Inc.; Boca Raton, Fla., office supplies retailer Office Depot Inc.; and Istanbul, Turkey-based supermarket chain Migros Türk TAS. It had also achieved successful initial public offerings of German chemical transport group Brenntag AG and Spanish airline booking technology company Amadeus IT Holding SA.
But the timing could have just as easily weakened its reputation. The Paris IPO of nursing homes operator Medica SA in February 2010 had been poorly received. U.K. real estate agent Foxtons Ltd., bought for £360 million ($603 million) in 2007 at the top of the housing market, had cost BC Partners its £50 million equity investment in a January 2010 debt-for-equity swap with Bank of America Corp. and Mizuho Bank Ltd. And in 2009, boiler manufacturer Baxi Group Ltd. came close to landing the firm in more hot water, though BC Partners avoided that fate by agreeing to merge the Derby, England, company with smaller Dutch boiler maker De Dietrich Remeha Group.
In other respects the fundraising could not have been better timed. There was hardly anybody else on the road. In Europe, says a veteran private equity fundraiser, the only big names fundraising at the time were Montagu Private Equity LLP, which was raising Fund IV, a €2.5 billion midmarket fund; and Swedish rival EQT Partners AB, which was marketing its €4.75 billion Fund VI. In the U.S., Kohlberg Kravis Roberts & Co. LP was raising a North American fund. That was about it.
If BC Partners were marketing the fund today, it would be in competition with the likes of Permira, Cinven Ltd., Apax Partners LP and Nordic Capital Ltd. Later this year, more big-name European firms will be back on the road, including Doughty Hanson & Co. and CVC Capital Partners. As more bubble-era funds come to the end of their investment periods, the competition will likely get even tougher.
There was another, possibly more important, timing factor. By this time last year, BC Partners had raised more than €5 billion. (It had reached a first closing at €4.5 billion in March 2011). Yet the euro-zone financial crisis had only really begun to dominate investors' thinking over the summer. About 80% of the work on Fund IX had been done: The low-hanging fruit had been plucked, and the biggest commitments had been completed. It was only the last 20% -- admittedly, always the hardest work -- that the London firm had to raise into the wind of anti-European sentiment in the U.S., the Middle East and Asia. In the end, according to data on its website, BC Partners raised 25% of its money from sovereign wealth funds, many of which are in Asia or the Middle East, as well as 37% from pension funds. By region, it raised about 40% from North America and 30% from Asia and the Middle East.
Even so, post-credit crunch lucky timing alone would not have sufficed. To raise such a large sum, BC Partners also needed clever strategy; pavement-pounding perseverance; a stable, experienced management team; and one of the best track records in the business.
First: the strategy. Managing partner and head of investor relations Charlie Bott, who led the fundraising effort, offered an early-bird discount of 5% on fees for investors who signed up before the first close, and selectively a further discount for really large commitments.
"If you were fast and big, like [two-time Olympic gold medalist] Usain Bolt, you did very well," says one observer of Bott's campaign.
More fundamentally, the new strategy required a cultural shift from the firm's previous funds. BC Partners agreed that all transaction fees should go to limited partners instead of the previous model of keeping 20% for the general partner. And it decided to change the "carry waterfall" from the U.S. model of paying out carried interest deal by deal to the European whole-fund model. In most European funds, the GP gets its 20% payout only once the fund itself is in carry.
"We were outliers on that," Bott told The Deal Pipeline in an interview at the time of the final closing in February. He added that BC Partners was a European fund and it was clear that investors wanted it to follow the European model in the future.
Second: perseverance. During a hard, 18-month slog, Bott's team identified about 1,150 possible investors, targeted 919, held meetings with more than 500 and converted close to 200, who signed up to actual commitments. The greater part of the legwork was done in-house, with specialist placement agents used only in two small geographies, the Netherlands and Saudi Arabia, to raise just 1.5% of the total.
And then there's the track record. Every firm makes costly mistakes. No warts-and-all presentation of BC Partners could ignore its €1.2 billion investment in U.K. gym operator Fitness First Group Ltd. A solvent restructuring this summer allowed Oaktree Capital Management LP and Marathon Asset Management LP to complete a debt-for-equity swap with BC Partners, reducing Fitness First's debt by close to £600 million. The firm's investment in Foxtons was also painful. But in March BC Partners bought back a majority stake in Foxtons, reportedly for between £55 million and £75 million. Now, according to one source, "Foxtons II" is doing very well.
The Baxi deal also turned out well. When BC Partners agreed in summer 2009 to merge Baxi with De Dietrich Remeha, the private equity firm injected €100 million and took a rare minority stake in the merged company, later renamed BDR Thermea Group BV. It was not until September 2011 that BDR's parent, Remeha Group BV, finally announced the acquisition of BC Partners' 40% holding. The exit price was undisclosed, but high enough, according to BDR chief Rob van Banning, to justify those two years of working together.
"They are happy and the management are happy," says van Banning of BC Partners' exit. "It has been also for them a very attractive deal."
Van Banning says 10 years of private equity ownership -- not all of it under BC Partners -- had left Baxi burdened with debt and "here and there a bit naked." That was despite acquisitions, capital investment and relatively healthy Ebitda. But he also recognizes that Andrew Newington and Jean-Baptiste Wautier, BC Partners' representatives on the BDR board, were "very intelligent business people" and "constructive partners." They had been focused on short-term profit, he says, and might sometimes have been ready to push BC Partners' own agenda even when it would not have been in the long-term interests of BDR.
"But when it became critical for them, they were very creative in finding ideas, in a financial way, to make a decent company out of it and get it [sorted] in a professional way," van Banning concludes. "So I have great respect for them."
The bottom line is that when buyout firms write down their equity in a company, they lose their investment once. When they do well, they can make several times their money. BC Partners made 3 times its investment with the March 2010 IPO and subsequent share sales of Brenntag. Including a final €611 million share sale in July 2012, BC Partners' 80%-owned holding company, Brachem Acquisitions SCA, raised a total of €2.89 billion from the sale of Brenntag stock. The €4.93 billion flotation in 2010 and follow-up share sales of Amadeus IT were even more profitable. They garnered BC Partners and partner Cinven 7 times their money.
"I think investors understand that in any portfolio of 15 to 18 companies in a fund, there will be some investments which, with the benefit of hindsight, you wish you hadn't made," says the veteran private equity fundraiser.
"But investors don't give money to 15 different investments; they give money to a fund. The trick in the business is to ensure that [in any one fund] the good investments far exceed the bad ones in terms of returns."