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					10 | EVCJ | November 2005                                                                                                           evcj.com


NEWS ANALYSIS

 Club buyout deals are becoming increasingly common, as private                                    Blackstone together you wonder
                                                                                                   what’s the point because it’s not like
 equity houses band together to purchase larger companies. But these                               one of those houses has expertise
 deals do not always go smoothly and there are some concerns about                                 that the other don’t.”
 what happens when houses fail to agree on strategy or exit timing and                                Colin Curvey, an associate director
                                                                                                   at Duke Street Capital, which has two
 about the impact on LPs’ investment diversification.                                              club deals in its portfolio, says one of
                                                                                                   the big differences today is the sums


In the club                                                                                        involved. “When you look back at club
                                                                                                   deals in the past the sums were much
                                                                                                   smaller. The original Focus deal, for
                                                                                                   example, required four partners to
            he joining forces of sever-                  will be implemented. “These things        raise just a few million pounds.”




 T          al private equity houses to
            buy an asset is not in itself
            a new development and
            goes back to the early
days of the industry. But what does
seem to be changing is that club
deals are becoming increasingly
                                                         should be agreed even before they
                                                         put in a bid,” she says.
                                                            Mounir Guen, CEO of private equi-
                                                         ty advisers MVision, says: “There’s
                                                         nothing wrong with club deals per se.
                                                         The issue is when things go wrong,
                                                         who sorts it out?” He adds that often
                                                                                                      He says that the more funds
                                                                                                   involved in a deal, the more compli-
                                                                                                   cated it gets. “If you have two funds
                                                                                                   then they can generally agree about
                                                                                                   most things and act as one, but
                                                                                                   when you have four it gets trickier.
                                                                                                   In larger clubs with more than two
common at the top end and also that                      there are riders and leaders in the       investors I would imagine a de facto
because of the growth in private                         club and that the leader is not neces-    leader emerges and the others will
equity funds much larger sums are                        sarily the largest fund. What is impor-   only veto decisions when they feel
generally involved than in the past.                     tant is establishing early on who the     quite strongly.”
   Another shift is that often in the                    leader or leaders are, he says.              Lovells’ Alison Hampton agrees
past the rationale for a club deal was                      Andre Jaeggi, managing director        that the fewer the houses involved,
to bring in a house with specific                        at LP investor Adveq Management,          the easier it is to establish roles and
industry expertise, while today the                      agrees: “There have been situations       responsibilities. This is particularly
main reason is frequently to increase                    in buyouts where nobody is really in      so when the houses involved have a
the funds’ firepower so that ever-                       charge. In venture capital the club       similar approach and philosophy.
larger acquisitions can be made.                         model makes it clearer who is doing       She says: “Another important issue
   In many ways the development of          “From an     what than in buyouts.” He acknowl-        is the personal relationships because
club deals is a positive one for the                     edges that the increasing size of buy-    when you unpeel some of these con-
industry because it is enabling buy-        LP           outs makes club deals necessary in        sortia you find the individuals often
out houses to acquire companies                          many cases but is concerned at what       know each other from way back. If
they would not be able to do on an
                                            perspec-     he sees as the lack of clarity when it    good personal relationships are
individual basis. “It’s a sign of an        tive the     comes to each house’s role and            there that can help a lot if there are
expanding market as it allows funds                      responsibility.                           problems later on.”
to go after larger assets,” says Piers      main            Candover’s Dennison says it is cru-       A concern in some quarters is the
Dennison, investor relations director                    cial to discuss in advance key ques-      perception that club deals lead to
at Candover.
                                            problem is   tions about exit strategy and timing.     escalating fees, given the number of
   Banding together at the top end          portfolio    “You must be careful when you team        parties involved. Others argue that
can also enable houses to get a good                     up with someone that they have a          because transaction fees are general-
price on assets because it reduces          diversifi-   similar outlook and philosophy and        ly based on the enterprise value of
competition. This is because there is                    are at a similar stage in their fund      the target company then fee levels
inevitably less competition the more
                                            cation”      cycle. There’s no point going into        should not be higher in a club deal
expensive the asset and if the larger                    business with a house that tends to       than if an individual house was
houses are already in a club they are                    hold its investments for 10 years if      acquiring the company.
not competing against each other.                        your approach is three years.”               Candover’s Dennison says: “I
   But there can be problems, seen                                                                 think the fees claim is a bit of a red
most recently at UK pub company                          Expert advice                             herring because total fees will be no
Spirit Group, where a complex                            Jaeggi says in the 1990s club deals in    higher than if it was an individual
financing structure is thought to be                     private equity tended to be about         house acquiring the company. What
causing difficulties in dividing up                      bringing in specific expertise for a      may be different is whether the GPs
the interests of its private equity                      restructuring, such as Silver Lake or     concerned rebate the transaction
owners Blackstone, CVC, Merrill                          Francisco Partners being brought in       fees to LPs but that’s a question for
Lynch and Texas Pacific.                                 on a tech deal because of their indus-    the partnership agreement and is
   Alison Hampton, a consultant at                       try know-how. Another LP executive,       nothing to do with whether it’s a
law firm Lovells, says when plan-                        who asked not to be named, suggest-       club deal or not.”
ning any club deal it is essential for                   ed many of the current club deals            A bigger issue, at least for some
the potential partners to agree                          lack the commercial rationale of          LPs, is the concern that club deals
issues up front, such as who is in                       involving different houses according      are contributing to “asset inflation”
control, how strategic changes will                      to their expertise: “When you see         and that they are making it harder
be handled and how and when exits                        Goldman Sachs, Texas Pacific and          for LPs to diversify risk.
evcj.com                                                                                                                   November 2005 | EVCJ | 11


                                                                                                            NEWS ANALYSIS

    Andre Jaeggi is worried about the
 frequency with which one club of
                                           underlying exposure they have, since
                                           the upsurge of club deals in the sec-
                                                                                      “How the            running the show and over how and
                                                                                                          when to exit an investment,” he says.
 private equity houses is selling an       ondary market: “Two GPs selling a          houses                Despite the potential pitfalls in
 asset to another club, in the second-     portfolio company to another group                             club deals it looks like the trend is set
 ary market. The issue is that many        of GPs on more expensive terms             work                to continue because without them
 LPs will be invested in several of the
 big funds and so may find them-
                                           makes LPs wonder if it’s not just
                                           about a rotation of ownership but at a
                                                                                      together            private equity houses will not be able
                                                                                                          to target such large companies. “Most
 selves indirectly paying a higher         higher price and without the compa-        is very             buyout funds would rather be the
 price for a portfolio company they        ny leaving the private equity system.”                         sole owner but where you don’t have
 already “own”.                               In addition to this concern is the      impor-              the fire-power on your own or want
    Jaeggi says: “I can see the benefit
 where a regional private equity house
                                           question of risk diversification, says
                                           Erik Kaas of Partners Group: “From
                                                                                      tant”               to bring in a house with a specialist
                                                                                                          angle it makes sense to do a club
 is selling to a pan-European fund and     an LP perspective the main problem                             deal,” says Duke Street’s Curvey.
 the company is moving up the chain,       is portfolio diversification because                             He adds that club deals have
 but where one club group is selling to    if I’m invested in three buyout                                enabled private equity houses to tar-
 another group with a similar skill set    funds and they’re in a club deal I’ve                          get ever-larger assets. “If you read the
 then there’s the danger of asset infla-   got a lot of exposure to one compa-                            papers it sounds like private equity is
 tion. You wonder whether the sale is      ny.”                                                           taking ownership of everything but in
 simply based on one group of private         He adds that generally club deals                           reality there are huge swathes of the
 equity houses needing to exit and the     must be looked at on a case-by-case                            stock market that are out of reach
 other needing to invest.”                 basis as to whether they make com-                             because of the size of those compa-
    Mvision’s Mounir Guen agrees, not-     mercial sense. “How the houses work                            nies. Club deals bring some of those
 ing investors are having to grapple       together is very important because                             companies within the reach of private
 with a different dynamic over the         there are lot of conflicts over who is                         equity.”



           EVCJ 6th Annual Awards




                                                                                                                        Sa da
                                                                                                                        th

                                                                                                                          ve te
           EVCJ AWARDS 2005
                      Work on the EVCJ Annual Awards begins in earnest during December 2005 and concludes mid-
                      January 2006. These awards are given for work undertaken during 2005 and in the case of specific     e
                      deals relates to deals closed between January 1 and December 31, 2005 inclusive, regardless of when
                      the deal was first announced.


                      EVCJ invites submissions for the following categories:
                                                                                                                                     www.evcjawards.com
                      •   Financial sponsor of the year - large funds       •   Venture realisation of the year: technology
                      •   Financial sponsor of the year - mid sized funds   •   Buyout realisation of the year by trade sale
                      •   VC house of the year: life sciences               •   Buyout realisation of the year by IPO
                      •   VC house of the year: technology                  •   Private equity advisory boutique of the year
                      •   LBO debt provider of the year                     •   Private equity accountancy firm of the year
                      •   Mid market debt provider of the year              •   Private equity law firm of the year
                      •   Mezzanine debt provider of the year               •   Fund raising of the year: venture
                      •   Venture realisation of the year: life sciences    •   Fund raising of the year: buyouts

             To nominate in any of the above categories please visit www.evcjawards.com.
           Award winners will be announced exclusively at the EVCJ Awards Drinks Reception,
                  to be held at The Trafalgar Hotel, London on the 31st January 2006

                 Admittance is by invitation only; email christa.buttigieg@thomson.com
                                        to register your attendance.

                                      Award submissions can either be sent in via www.evcjawards.com
                                      or can be sent to any of the following in the editorial team:
                                      Lisa Bushrod at lisa.Bushrod@thomson.com or +44 (0)207 369 7768
                                      Angela Sormani at angela.sormani@thomson.com or +44 (0)207 369 7675
                                      Tom Allchorne at tom.allchorne@thomson.com or +44 (0)207 369 7516

				
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