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Private Equity RoundupConsumer Plays, Bonus Pay & Problems In The U.K.

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2 | Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book

PRIVATE EQUITY ROUNDUP: CONSUMER PLAYS, BONUS PAY & PROBLEMS IN THE U.K.

CONTENTS

FROM PRIVATE EQUITY ANALYST

DESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPING FOR CONSUMER DEALS............................................................... 4

PE BONUSES RISE IN 2011 AMID LONG-TERM PRESSURE ON PAY ............................................................................................... 10

PATIENCE PAYS OFF FOR FRIEDMAN FLEISCHER & LOWE’S MASTO ............................................................................................12

FROM PRIVATE EQUITY NEWS

CEE BUYOUT EXECS HOLD THEIR BREATH ..................................................................................................................................... 14

GIC MULLS SALE OF $1B SECONDARIES INTERESTS......................................................................................................................17

UK INNOVATION FUND BECOMES A JUMBO FLOP ......................................................................................................................... 18

3Private Equity Roundup: Consumer Plays, Bonus Pay & Problems In The U.K. A Private Equity & Venture Capital e-Book |

INTRODUCTION

Exclusive Global Fund News & Industry Insights

No matter which side of the fund negotiating table you’re on, you must have a

clear picture of what’s going on across the market - where GPs are finding the

best returns, trends in terms, pay and compliance, which firms are prospering

or struggling and who’s behind landmark deals. Only Dow Jones provides

a comprehensive – and critical – perspective of the global fund-raising

environment with exclusive reporting, accurate research and unbiased analysis

and commentary.

This Private Equity Roundup features a collection of hand-selected articles

from Private Equity Analyst and Private Equity News that detail some of the

latest trends and troubles affecting the asset class in the U.S. and Europe.

Sincerely,

Robert Dunn

Director, Product Management, Dow Jones Private Equity & Venture Capital

Dow Jones & Company


From Private Equity Analyst

Private equity increasingly sees a pot of gold at the end of the consumer rainbow, but it remains to be seen if the slew of new consumer funds can translate into high-end returns.

By Beina Xu

December 2011

TSG Consumer Partners’ fund raising for its

sixth vehicle appeared to be over before it even

began. In less than 60 days, the fund garnered

over $2 billion of interest for TSG 6 LP, which

is hard capped at $1.2 billion and will undoubt-

edly leave some investors out of the fray.

Yet TSG isn’t the only private equity firm seek-

ing capital for a consumer-focused fund this

year. Roughly a dozen private equity firms spe-

cializing in different corners of the consumer

space have either launched marketing efforts

for new funds or plan to do so in the next 12

months (see chart on page 16). Add to that

capital raised by firms such as Leonard Green

& Partners and Berkshire Partners, which

include consumer products as one of a hand-

ful of industry targets within their latest funds,

and buyout firms should be well capitalized

to snap up consumer brands over the next

few years.

However, the landscape in which these firms

look to put their money to work has grown more

complex amid ongoing economic uncertainty

and sluggish consumer demand. Firms that

are banking on the consumer sector increas-

ingly seek companies they believe have the

power to thrive in a slow-growth environment.

“In a world where growth is 1% to 2%, it basi-

cally comes down to a market share game

– either you’re going to take it, or lose it,”

Kayvan Heravi, managing director at LNK

Partners, said at a recent retail conference.

An LP House DividedBefore they can focus on deals, consumer-

focused private equity firms first must raise

capital, which requires wooing a community of

investors with varying degrees of skepticism

toward a dedicated consumer strategy.

The head of private equity at one large U.S.

endowment said that many investors don’t

have a specialized interest in consumer-

focused funds. Instead, those investors

prefer to back firms that target several sec-

tors beyond the consumer space, to spread

DESPITE SLUGGISH ECONOMY, PE FIRMS STILL SHOPPING FOR CONSUMER DEALS



the risk of potentially being overexposed to a

single sector. Still other investors welcome a

dedicated consumer-focused fund. Marc der

Kinderen, co-founder of 747 Capital, a fund-of-

funds manager focused exclusively on small

buyout and growth funds, said that his firm pre-

fers to back a consumer-focused vehicle over a

generalist fund that invests in the space.

“We’ve noticed that everyone thinks they can

do consumer deals, but it’s not as easy as it

seems,” he said. “Distribution is complicated.

How do you get the product into Walmart?

How do you make sure you deliver on time?

It sounds so easy, but so much can go wrong.”

Plenty of firms took their share of hits in the

space during the recent recession, and LPs

haven’t forgotten. Investors are starting to

look at how much of the portfolio is staples

and is defensible, said one fund-of-funds man-

ager. Restaurants seemed to be one niche that

concerns LPs. “If you look at the mortality rate

for restaurant deals in general, about half of

them turn out to be zeros,” this fund-of-funds

manager said.

Restaurant operator Buffets Inc., which

Sentinel Capital Partners and CI Capital

Partners bought in 2000 for $643 million, ran

into troubles and eventually filed for Chapter

11 protection in early 2008. Other bankrupt-

cies include the Black Angus Steakhouse

chain, backed by Versa Capital Management,

which filed for bankruptcy in 2009, and Castle

Harlan’s Perkins & Marie Callender’s Inc., which

plans to exit Chapter 11 with backing from

Wayzata Investment Partners.

A Pricey SectorPrivate equity firms continue to put money to

work into consumer and retail deals, driving up

valuations for quality assets, even if the pace of

new deals has slowed more recently. Financial

sponsor-backed acquisitions of consumer and

retail companies numbered 33 in the second

quarter, totaling $4.2 billion, according to data

provider Dealogic. A rush of deals in the fourth

quarter of last year saw 31 acquisitions done at

a dollar volume of $14.6 billion.

Although the pace slowed during the third quar-

ter with 26 deals, investors say that demand

for healthy growth-oriented companies still

outstrips supply, pushing up valuations. “Clean

companies, where there’s no obvious prob-

lem, are trading for prices I’ve never seen,”

said Heravi.

A quality business can command valuations

ranging to as much as eight- to 10-times earn-

ings before interest, taxes, depreciation and

amortization, according to Glenn Gurtcheff,

head of Harris Williams & Co.’s consumer group.

“We’re not surprised by a double-digit to low-

teens multiple for a great company; however,

six- to eight-times adjusted Ebitda is more

the norm,” said Ramsey Goodrich, manag-

ing director at investment banking firm Carter

Morse & Mathias.

Valuations are strong for companies target-

ing either discount brands or what are termed



“aspirational” brands, which carry a higher

price point but aren’t quite defined as luxury.

The market hasn’t been so friendly to com-

panies in the middle of the pricing spectrum,

said Goodrich.

Aspirational brands have net plenty of atten-

tion from private equity of late; premium denim

jeans company J Brand Inc. sold a majority

stake to Star Avenue Capital LLC, a consumer

growth-equity vehicle launched with Creative

Artists Agency and Irving Place Capital, last

year. Sun Capital Partners-backed Kellwood

Co. added Scotch & Soda BV, a Dutch apparel

business, this summer.

At the opposite end of the spectrum, Ares

Management and the Canada Pension Plan

Investment Board agreed to acquire 99¢ Only

Stores Inc. in an October deal valuing the com-

pany’s equity at roughly $1.6 billion. Lincolnshire

Management picked up Phoenix Brands, a roll-

up of budget household-care brands, in March.

Currently, the most active subsectors have

been food and beverage, followed by retail and

restaurants, said Gurtcheff. “People never used

to think it was high growth, but the demand side

doesn’t change either,” he said. “All of a sudden,

what didn’t look so sexy might look a little

more sexy.”

Occupy WalletWith niches that are indeed still active, private

equity portfolio companies will need to fight hard

for those consumer dollars that are being spent.

“People think of the 1% and the 99%, but I really

look at the 9% and the 91%,” said Jeff Edelman,

director of retail and consumer advisory ser-

vices at McGladrey & Pullen LLP.

Private equity’s battle for consumer dollars has

pushed firms to take a hard look at how to drive

growth. At a recent conference, AJ Brohinsky,

senior director at KKR Capstone, said that two-

thirds of his firm’s work with consumer portfolio

companies involves the addressing of pricing.

The firm tends to invest in mature brands, and

will “bring a playbook” to things like product

strategy, getting pricing right, and trade promo-

tion spend management in order to drive value.

On the growth side, some companies have

taken chances to ensure they net market share

from competitors. In 2009, in the midst of the

recession, Hudson Clothing LLC, a premium

denim brand backed by Fireman Capital, came

out with a $1,000 jean called Resurrection,

made from scraps of old denim. It was part of

the launch of a higher price-point collection

and sold out at Barneys New York, said Dan

Fireman, managing partner at the firm.

“All the other denim businesses were coming

up with their ‘recession collection,’ going to a

lower price point, but Hudson decided to build

up its brand,” he said. Hudson experienced an

increase of 45% to 50% in sales over the course

of this past year.

But firms must also take care not to grow too

quickly, investors say. It’s not just stretching

supply chains, but some companies end up

overdoing channel growth – suddenly, earlier



than expected, loyal customers are dissatis-

fied with the product’s presence at Walmart or

Target. “People forget that there’s good growth

and bad growth,” said John Kenney, a TSG

managing director.

Strategics Step UpOnce they’ve garnered that all-too-precious

market share, private equity firms expect to

turn to a community of strategic buyers to exit

their deals, although there’s some question

about how long that opportunity will last.

Strategic acquirers have been ideal targets for

private equity exits with companies such as

Nestle SA and Sara Lee Corp. all stepping up

to buy private equity-backed consumer busi-

nesses over the past 12 months.

“Even though the environment is uncer-

tain, we are extremely active in M&A, and are

entering into new categories,” Melissa Bailey,

head of M&A at PepsiCo Inc., said at a recent

conference. She added that its Global Nutrition

Group is looking to invest in fruits, vegetables,

grains and dairy.

Starbucks Corp., meanwhile, has recently put

itself on the map as a potential acquirer of pri-

vate equity-backed properties. The coffee giant

bought Evolution Fresh, a natural juice busi-

ness backed by Fireman Capital, for $30 million

as part of its efforts to market healthier prod-

ucts. The move has some industry observers

Top Five Buyout Deals for US Targets



Select Consumer-Focused Firms Raising Funds in 2011/2012



wondering if similar private equity-backed

consumer goods products will be of interest

to Starbucks, including VMG Partners-backed

KIND LLC, the fruit-and-nut granola bar already

distributed in its stores. In some cases, however,

strategic acquirers are acting as competitors to

PE firms by investing directly in small, high-

growth consumer product and food and

beverage companies.

PepsiCo, for example, acquired a minor-

ity stake in coconut water drink One Natural

Experience, alongside Catterton Partners, in

2009. It increased its stake to a majority inter-

est through a follow-on investment, buying part

of Catterton’s interest. “More recently we have

had some more venture-like investments – we

are trying to find the ‘wow’ brands, and have

had discussions about setting up our corporate

venture cap group,” said PepsiCo’s Bailey.

The Consumer’s Cloudy Crystal BallExactly how all of the private equity inter-

est in the consumer space plays out over the

next year to 18 months remains to be seen. An

uncertain housing market and slow job growth

makes it tough to say exactly when consumer

confidence will stage a significant comeback.

But private equity investors contend that these

macroeconomic drivers don’t necessarily dic-

tate where they will invest next.

“We’ve always been more micro than macro,”

said Josh Lutzker, managing director at Boston-

based Berkshire Partners, which early last year

sold makeup company Bare Escentuals Inc. to

Japanese cosmetics giant Shiseido Inc.. “You

can invest in a category that has pretty modest

overall category growth, but if you identify lead-

ers and the emerging players, you can generate

really exciting returns.”

–With reporting by Laura Kreutzer



GP MANAGEMENT UPDATE

PE Bonuses Rise in 2011 Amid Long-Term Pressure on Pay

By Mohammed Aly Sergie

December 2011

Bonus season is just around the corner

and unlike some other corners of the finance

industry, many private equity professionals

have reason to celebrate.

Most private equity firms award bonuses, which

make up more than half of annual compensa-

tion for associates and principals, in December

and January, according to the 2012 edition of

the Dow Jones Private Equity Analyst-Glocap

Compensation Study, a research report jointly

produced by Dow Jones & Co. and New York-

based executive recruiter Glocap Search LLC.

This year buyout executives can expect to see

average bonuses rise by half a percentage

point for senior ranking partners to anywhere

between 1% and 3% for junior and mid-level

professionals, according to the report.

Improvement in overall private equity fund-

raising has given bonuses a lift and marks an

ongoing turnaround from 2008 and 2009 when

“bonuses took a hit,” according to Brian Korb,

partner and head of strategy at Glocap.

“The turbulence in the public markets isn’t

causing trepidation among limited partners”

who are investing in private equity funds, Korb

said, which is driving compensation higher.

Korb added that he expects compensation to

continue to improve for another two years until

pay reaches 2007 levels, after which he expects

it to then taper off and mirror the inflation rate

or growth in the gross domestic product.

“Something really big needs to happen” to sur-

pass the 2007 equilibrium point, such as large

flows of new capital from sovereign wealth

funds or outstanding performance from exist-

ing investments, Korb said.

The average base pay is expected to remain

steady in 2011, according to the report, with

the increase in compensation coming almost

entirely from bonuses. Principals expect to

earn an average bonus of $345,000 this year,

up $10,000 from a year earlier. Senior associ-

ates, meanwhile, will bring in an average bonus of

$165,000 in 2011, a $3,000 increase compared



to last year’s bonus.

Although private equity’s compensation model

tends to be steadier than Wall Street’s more

volatile bonus system, some firms have tried

to borrow an investment banking formula that

helps differentiate between star performers

while keeping pay comparable for employees in

the same class.

Under this structure, base salaries are uniform

across a class of associates or vice presidents,

but a variable bonus takes into account indi-

vidual or team performance. This rewards

executives that work in certain hot sectors pro-

ducing outsize returns, Korb said.

The slow, steady growth in private equity com-

pensation contrasts starkly to the volatile

swings in investment banking bonuses, which

are expected to shrink by 30% this year, accord-

ing to The Wall Street Journal. But recovery in

private equity’s compensation model faces

pressure and won’t last for long, said Joseph T.

Healy, senior client partner and co-head of the

private equity practice at recruiting firm Korn/

Ferry International.

Healy said a few “factors will lower remunera-

tion in the private equity business” in the long

term, including a reduction of management fee

income from smaller fund sizes; a shift in how

firms share fees with limited partners, which

affects bonus pools; and pressure on manage-

ment fee percentages, especially as funds move

past their investment periods.

Dealmakers at firms that haven’t been able to

raise a new fund will start to see steep declines

in compensation soon, Healy said, as the firms

slowly close down shop. “The industry isn’t

going away, but it’s a story of some firms win-

ning and some firms losing, so it’s hard to make

a broad generalization,” he added.

Bonus GainsAverage anticipated bonus payouts for 2011/12 by individual positionsat buyout and growth-equity �rms

1-10%

50-74%

ASSOCIATES

SEN. ASSOCIATES

VICE PRESIDENTS

PRINCIPALS

PARTNERS $1.01 MILLION

$345,000

$249,000

$165,000

$105,000

Source: Glocap Search LLC



RISING STAR

Patience Pays Off For Friedman Fleischer & Lowe’s Masto

By Laura Kreutzer

December 2011

Friedman Fleischer & Lowe’s Chris Masto is not

a man who gets easily riled.

But in May 2010, the young partner’s patience

was put the test while negotiating an add-on

acquisition in Canada for Speedy Cash Holdings

Inc., a Wichita, Kan.-based specialty lender the

firm bought back in 2008.

“The company had an eccentric entrepreneur-

ial owner and some complex family dynamics.

It literally took Chris a year to get that deal

done and even [he] showed some exasperation

from time to time,” said Friedman Fleischer co-

founder Tully Friedman.

Nonetheless, Speedy Cash Holdings ultimately

closed the deal in May 2011, thanks partly to

Masto’s patience and persistence, two char-

acteristics that his colleagues and Friedman

Fleischer’s limited partners say the 44-year old

partner possesses in abundance. “Unlike me,

he never gets irritated or [at least] never shows

it,” said Friedman. “It’s nice to have someone

around who’s completely unflappable.”

Only 29-years old when he helped co-found

Friedman Fleischer back in 1997, Masto’s easy

going manner and persistence have been

helpful both in landing deals and in recruiting

management talent to portfolio companies,

according to Friedman. Perhaps the deal that

has defined Masto’s career thus far has been

the one for mattress company Tempur-Pedic

International Inc. Back in 2002, when the com-

pany’s Swedish entrepreneurs wanted to sell

down some of their roughly 80% ownership

stake, Friedman Fleischer saw an opportunity.

However, a month into the negotiations, a co-

investor got cold feet, leaving Masto with the

task of convincing the sellers his firm could still

get the deal done.

Friedman Fleischer quickly brought in Boston-

based TA Associates and together the two

firms invested some $150 million in equity into

the $350 million deal. They also recruited a new

management team and helped the mattress

manufacturer alter its distribution model.



“The company was sold mainly through info-

mercials and specialty stores like Brookstone,”

said Masto, “and we felt that if they wanted

to be successful, they needed to sell through

mainstream mattress retailers.”

Between 2002 and late 2005, Tempur-Pedic

grew its sales from $260 million to $837 million.

Friedman Fleischer took the company public

in December 2003 and over time sold down

its stake, completely exiting the business in

2006 and returning around 10-times the firm’s

original investment.

But that wasn’t the end of the relationship.

Masto remained on the company’s board

and in March 2008 when stock prices began

to languish, convinced his firm to reinvest in

the now-public Tempur-Pedic via a common

stock purchase.

In June 2008, Masto once again recruited a new

management team, bringing Mark Sarvary on

board as Tempur-Pedic’s new chief executive.

“He was the one that painted the picture for me

of the potential of Tempur-Pedic,” Sarvary said.

“He’s a very eloquent and compelling presenter.”

The same combination of enthusiasm and

intelligence has also helped Masto earn

Friedman’s trust.

“My basic standard for evaluating everyone [is]

‘Could they run a corner grocery store?’ which

is actually very hard if you think of all the things

you have to do,” said Friedman. “And the other

thing is, ‘Would you trust your kids with him?’

He would pass with flying colors on both those

tests, and most politicians would fail to pass on

one or both of those.”

CHRIS MASTO

Career PathMasto helped launch Friedman Fleischer &

Lowe in 1997 at age 29, after working as a

management consultant for Bain & Co. He

started his investment career as a financial ana-

lyst in the corporate finance department

of Morgan Stanley & Co.

EducationSc.B. in electrical engineering from Brown

University, M.B.A from Harvard Business School

Board SeatsTempur-Pedic International Inc., Speedy Cash

Holdings Corp. and TriTech Holdings Inc.


From Private Equity News

CEE BUYOUT EXECS HOLD THEIR BREATH

Fears about the eurozone crisis are rising in neighbouring central and eastern Europe

By Jennifer Bollen

12 December 2011

As the festive season approaches, executives

focused on central and eastern Europe are

cheery about their market, citing growth, a high

level of interest in the region and even some

“good news”. But the outlook for the New Year

looks less bright, with fears rising that the euro-

zone crisis will further damage deal activity.

The confidence in CEE comes despite the grow-

ing pressure of the eurozone crisis in the region’s

neighbouring west. Last week, reports said the

European Central Bank was preparing a €1 tril-

lion rescue package, which a research note from

Deutsche Bank said would pave the way for a

“colossal market intervention” in the European

sovereign bond market.

Thierry Baudon, managing partner of Mid

Europa Partners, said there was hope for some

of the key countries in the region, which he

identified as Poland, the Czech Republic and

Slovakia. He said: “Despite all of this uncertainty

and chaos, the region is still growing and has

maintained the structural growth differential

with western Europe which has been the hall-

mark of the region as part of its catch-up with

core Europe. That is good news.”

Dawid Sukacz, a managing partner at Polish

private equity firm Concordia 21, added the

macroeconomic factors in Poland were largely

positive. He said: “For Poland, no major changes

have happened. There are still a lot of players

looking for transactions.”

Poland’s GDP rise is forecast as 3% next year,

down slightly from 3.8% this year, according to

the International Monetary Fund. Meanwhile,

Russia’s is forecast as 4.1% next year, Romania’s

3.5% and Lithuania’s 3.4%, although its GDP

for this year was forecast as 6%. The forecasts

compare favourably with more pessimistic out-

looks for western European economies – the

UK’s GDP is forecast as 1.6% next year, France’s

1.4% and Italy’s 0.3%.

Baudon said one of the main factors contribut-

ing to economic strength in CEE was the region’s

manufacturing sector, which he said continued



to create jobs and attract foreign investment. He

added companies increasingly transferred man-

ufacturing from western to eastern Europe while

Asian businesses were moving plants from local

operations to central Europe for logistic reasons.

Hope for steady deal flowAt the same time some firms are expecting to

take advantage of low prices on offer. Sukacz

said firms were increasingly on the lookout for

take-privates following significant falls in valu-

ations. He said: “More and more people are

looking for potential public-to-private transac-

tions, especially in Poland. The market has been

historically quieter and a large number of com-

panies have been listed. The valuations are going

down and in the future there is some potential in

that space.”

Deal valuations in the region are largely unknown

in the third quarter but deal volume has been

more or less in line with recent quarterly trends.

According to data provider Dealogic, firms

agreed 15 deals in the third quarter, compared

with 10 in the previous quarter and 11 in the first.

In the third quarter of last year, firms agreed

17 deals.

Deals completed in the third quarter include

buyout firm Advent International’s acquisitions

of manufacturers TES Vsetin and MezServis

from Czech firm Penta Investments, both agreed

in May. The terms were undisclosed but Advent’s

€1bn central and eastern Europe-focused fund

typically invests between €35m to €100m of

equity per deal.

Also in the third quarter, listed private equity

house CapMan and Belgian-based investment

company Gimv completed their joint invest-

ment in photo services provider Expert Photo, a

growth capital deal they agreed in July.

In October, Mid Europa completed its acquisition

of a 65% stake in hospital operator Kent Hospital

Group. The firm also agreed to increase its stake

to up to 90% over time.

Fears over neighboursHowever, despite confidence in the region itself,

executives remain concerned about the impact

of the eurozone crisis.

Marcus Svedberg, chief economist at invest-

ment manager East Capital, said in a statement

last week that eastern Europe could grow as long

a there was no deep recession in the eurozone.

He said: “We do not believe in decoupling in gen-

eral and particularly not in eastern Europe.”

He outlined three broad risks facing the region

next year – dependence on external sources of

growth, substantial economic imbalances and

domestic political turmoil – and said eastern

Europe would be characterised by an economic

slowdown and market recovery next year.

Last month the IMF said in a statement it had

received a request from the Hungarian authori-

ties for possible financial assistance and

Christine Lagarde, managing director of the

IMF, outlined priorities for Russia after meet-

ing Russian officials including President Dmitry

Medvedev to discuss the challenges facing

emerging Europe.



Baudon said his main concern was local banks’

strong ties to western European institutions,

which he highlighted owned a large proportion of

banks in CEE. He said: “With everything going on

in western Europe, banks fundamentally need

to reduce balance sheets. Availability of financ-

ing for consumers and private equity in central

Europe could become seriously constrained.

This has not happened yet, but it looks like debt

quantums have been dropping over the last few

weeks.” He expected the growing crisis in west-

ern Europe to lead to a fall in deal volume, saying:

“There could always be opportunities that buck

the trend but logically there should be fewer

deals because there should be fewer sellers.”

Tough competition in a stagnant funds marketFundraising by central and eastern Europe-

based firms slumped by the third quarter. Data

provider Preqin said firms raised €2.8bn across

18 vehicles in the first three quarters, the lowest

in the first three quarters of any year over the

past five years. The number of funds was also

the lowest raised in the first three quarters over

the past five years.

Meanwhile, firms are competing to raise 102

funds targeting an aggregate €14.3bn, the big-

gest of which is a $1.5bn buyout fund managed

by Avangard Asset Management. Akina is rais-

ing the second-largest, a €720m fund of funds,

while Switzerland-based LGT Capital Partners is

raising the third-largest, a €600m fund of funds.

However, in October, central and eastern Europe-

focused buyout firm Abris Capital Partners

provided some positive news for the region when

it raised almost half of its latest fund in a matter

of months after strong demand from investors

for exposure to the region.

The firm had raised €210m of its targeted

€450m in a first close following the launch

of the process in June, according to a person

familiar with the situation. The source said the

relatively quick nature of fundraising amid a dif-

ficult market environment reflected investors’

appetite for deals in the CEE region.



GIC MULLS SALE OF $1BN SECONDARIES INTERESTS

By Kiel Porter

05 December 2011

Sovereign wealth fund the Government of

Singapore Investment Corporation has begun

discussions over the possible sale of a portfo-

lio of private equity fund interests which could

total $1bn, according to two people familiar with

the matter.

GIC, which manages private equity through

its subsidiary GIC Special Investments, has

engaged intermediaries to handle the sale pro-

cess according to the sources.

The contents of the portfolio are currently

unknown, however one person with knowledge

of the matter said that they were likely to be pri-

marily US fund interests with a minimum value

of $500m, potentially rising depending on the

level of interest. GIC has investments in funds

managed by several of the private equity indus-

try’s largest houses including Blackstone Group

and Apax Partners.

GIC is the latest in a string of banks and finan-

cial institutions worldwide to dispose of private

equity assets as they seek to comply with

tougher capital requirements and generate

early liquidity. In the 12 months to June this year,

$16.1bn of secondaries deals were signed glob-

ally, 15% up on the same period last year when

$14bn worth of deals were signed, according to

UBS data.

Last week it was reported that the French bank

BNP Paribas was in the process of selling a

legacy portfolio of private equity fund interests

it inherited when it purchased the Belgian bank

Fortis in 2009. The assets – which comprise

direct investments and co-investments in small

and mid-sized companies as well as stakes in pri-

vate equity funds – have a guide price of $700m.

UBS is handling the sale process.

A range of banks including Citigroup, Bank of

America Merrill Lynch, Barclays Bank and HSH

Nordbank have sold private equity assets over

the past 18 months, while the sale of WestLB and

CDC’s fund interest portfolios, worth a combined

$500m, are now “very advanced”, according to

two people familiar with the situation.

Private equity accounts for about 10% of GIC’s

asset allocation, alongside infrastructure invest-

ments, according to its annual report for the year

to March. The group has not disclosed the size

of its assets under management but has been

widely cited as having about $200bn, giving it a

commitment to private equity of $20bn.

In addition to backing third party managers,

GIC invests directly, completing large-cap and

small-cap buyouts alongside mezzanine debt,

distressed debt and secondary fund deals.

The group was previously reported to have

submitted a joint bid alongside the Canadian

pension fund Caisse de Dépôt et Placement du

Quebec for the private equity arm of insurance

group Axa.



UK INNOVATION FUND BECOMES A JUMBO FLOP

The government’s flagship private equity fund quietly fell short in its bid to attract third-party investors

By Kiel Porter

05 December 2011

As the world economy moved from a state of

credit constraint to full-blooded recession in early

2009, the UK’s governing Labour Party moved

away from the laissez faire position to industry it

had adopted over much of the previous decade

to something more proactive and interventionist.

A number of initiatives were introduced, including

the Strategic Investment Fund, aimed at directly

supported manufacturing, and more capital for

the export-focused government department,

United Kingdom Trade & Investment.

A key plank of this was the UKIIF, a scheme

launched in June 2009 to attract £1bn in private

sector investment using state funds as seed cap-

ital in a private equity fund structure. The fund

was hailed by UK Prime Minister Gordon Brown

as providing the ability to “foster early-stage

technology businesses with real potential”.

However, this summer, following a change of

government in May 2010 when a Conservative-

led coalition with the Liberal Democrats on

board took the helm, it transpired that the fund

had fallen well short of the proposed £1bn target

having raised just £5m in third-party capital

at the final close. Even in a difficult fundraising

environment the figures represented a huge dis-

appointment, with one European investor calling

it “a categorical failure by all parties involved”.

So where did it all go wrong?

Promising startFollowing the June 2009 announcement of the

fund, further details of how it would be struc-

tured began to emerge.

The Department of Business, Innovation and

Skills, advised by David Quysner, the former

chairman of the British Private Equity and

Venture Capital Association and an executive of

private equity investor 3i Group, took the deci-

sion that two funds – covering the technology

and environmental sectors, respectively – would

be created with the government mandating two

private sector managers to run the ventures.

The funds would operate on a fund of funds basis

rather than directly investing, with both the state



and the mandated manager providing capital and

the manager then soliciting commitments from

third-party investors in order to reach the target.

The process for selecting the managers began

in July 2009, according to a person close to the

Department of Business, Innovation and Skills.

An investor “summit” was then held in November

2009 for interested parties, with government

minister Lord Paul Drayson, a science minis-

ter at the Department of Business, Innovation

and Skills, keen to explain the funds’ aims

and emphasise that while there would be a

state element to the funds the UKIIF was

intended to be “fundamentally a hard-nosed

commercial proposition”.

Drayson said: “UKIIF will be a fund of funds that

will invest in the top-quartile performing tech

funds in the UK and Europe. It will have a spread

across a number of specialist funds and a

portfolio of investments in high-growth compa-

nies. It will have a ruthless focus on achieving a

strong return.”

The summit attracted the interest of key players

in both the investor and fund manager commu-

nity. Government records show that among the

audience were representatives from Aviva, Axa,

BP, Greater Manchester Pension Fund, RailPen

Investments, Standard Life, West Midlands

Pension Fund, Abingworth, Advent, Albion,

Amadeus, Capital Dynamics, Hermes, MTI and

Pantheon Ventures.

A number of these attendees, including private

equity firms Pantheon and Capital Dynamics,

had also bid for the mandate to manage the

funds. However, in December 2009, the gov-

ernment announced that the investment arm of

the BT pension scheme, Hermes, and the fund

subsidiary of multilateral lender the European

Investment Bank, the European Investment

Fund, had won the mandates for the environ-

ment and technology funds respectively.

The two funds moved swiftly to announce first

closes – the point at which a fund can begin

investing – with Hermes holding a first close in

January 2010 and the EIF the following month.

The Hermes Environmental Innovation Fund

held a first close of £125m with a £50m com-

mitment from the government and £75m from

Hermes’ parent, the BT pension scheme. The

EIF’s Future Technologies Fund held a first close

of £200m with funding coming equally from the

government and EIF.

The closes were met with great fanfare by the

Labour government and private sector alike with

Lewis Chong, counsel at law firm O’Melveny &

Myers, echoing government sentiment that “the

parties did well to get a close so quickly”. Further

announcements on subsequent closes by both

funds were expected by the end of 2010 but

aside from mentions of commitments to manag-

ers being made, little information on the funds’

progress was provided.

Lack of interestInstead, the two funds quietly held their final

closes over the summer of 2011 with a spokes-

man for Hermes confirming that it had managed



to attract just £5m in third party commitments

while a spokesman for the EIF confirmed it

had failed to garner any outside capital. One

European investor said that the UKIIF funds

“didn’t provide anything I couldn’t find elsewhere

with far less restrictive investment criteria”.

The consensus view from investors was that the

UKIIF funds were too restrictive in their investment

criteria when weighed against other managers’

fundraising that targeted the same sector.

Both funds had to invest 50% of their capital in

UK-based managers while co-investments were

also limited, according to three people familiar

with the situation.

The EIF and Hermes declined to comment on

the fundraising besides confirming totals, while

a spokesman for the Department of Business,

Innovation and Skills said that the £1bn figure

trumpeted in 2009 was an “aspirational target”

while the £330m raised makes the UKIIF “one of

the largest technology fund of funds in Europe”.

While the fundraising targets were not met, the

funds still have significant capital to deploy and

both have been actively investing. The EIF has

made commitments to a number of managers

including the Munich-based firm Acton Capital

Partners and Netherlands buyout firm Gilde

Healthcare Partners.

Hermes, meanwhile, is understood to be an

investor in the latest renewable energy funds of

UK-based private equity investor HgCapital and

Zouk Ventures, according to a person familiar

with the situation.

The next big ideaThe new UK administration has also been keen

to increase the provision of equity capital to

businesses. However, unlike with UKIIF, the new

coalition government chose to pressure the

banking sector to fund the endeavour.

The Business Growth Fund was established in

July last year to provide growth capital for small

and medium sized businesses. It was born out

of Project Merlin, discussions between the gov-

ernment and the UK’s largest banks over lending

targets to SMEs.

The BGF will be seeded with £300m from five UK

banks – Barclays, HSBC, Lloyds Banking Group,

Royal Bank of Scotland and Standard Chartered

– with the aim of taking minority stakes of

between £2m and £10m in up 20 to SMEs with

turnover of up to £100m. Should these initial

investments be deemed a success the banks

have the option of increasing the size of their

total commitment to the BGF to £2.5bn.

The new enterprise was launched in April 2011

with the former CCMP Capital partner Stephen

Welton becoming chief executive and the former

head of industrial company Williams, Sir Nigel

Rudd, becoming chairman. The BGF has made

two investments – in online business out-

sourcing firm Benefex and travel management

company Statesman Travel Group – worth a

combined £8m, while extensively hiring in an

effort to build a regional network in addition to

its Birmingham headquarters.


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