Europe – November 2003

Europe 2003-11-01 Staff Writer <strong>Europe<br> Monitor</strong><br> <sec level="2"><strong>Called to account by IAS 27</strong><br> <quotation><bold>While general partners are focusing their minds on where the next deal is coming from or how t


Called to account by IAS 27
While general partners are focusing their minds on where the next deal is coming from or how the next fundraising target is to be achieved, a potential new accounting burden is creeping up on them.

In May 2002, the London-based International Accounting Standards Board (IASB) published its first draft on ‘Improvements to International Accounting Standards (IAS)’, with a view to harmonising the way in which companies in the European Union present their accounts. One of the stipulations in the document, IAS 27, required that publicly listed companies – of which there are around 7,000 across the EU – will have to prepare consolidated accounts.

According to a definition on the website of chartered accountants Hacker Young, consolidation is “the process of combining and adjusting the individual financial statements of a parent and its subsidiary undertakings so as to present the information as if the group were one single entity.” Subjecting the accounts of complex and publicly traded companies to this treatment has obvious benefits for investors.

Whether it also makes sense to consolidate the accounts of unlisted companies is a different matter, particularly if such companies make up an investment portfolio owned by a private equity fund. From a private equity point of view, the trouble with IAS is that it does not explicitly exclude privately owned companies: the IASB has left the decision on whether the new standards should also be applied to non-listed companies in the hands of individual EU member states. This is why the issue constitutes a potential trap door for unwary general partners.

In November, the UK’s Department of Trade and Industry is due to decide on the application of IAS for non-listed companies, with other EU member states’ taking the same decision thereafter. There will then be a period of just over a year for further consultation before the IASB rules become binding for all European listed companies in January 2005. If by then the EU’s member states have taken the view that the standards should also apply to privately owned companies, private equity would require an ‘industryspecific’ exemption to avoid the impact of IAS 27.

Misleading at worst
On one level, applying IAS 27 to unquoted companies would require private equity funds to hand their investors quarterly accounts for every single portfolio company. That in itself would not necessarily be a bad thing: considerations of sensitivity aside, individual information on each investee firm would no doubt be useful to LPs, provided they have the time to digest it.

But IAS 27 would also require general partners to lump individual portfolio company performance data together, the benefits of which are more difficult to see. Unsurprisingly, the industry is critical of the prospect. “Of course the industry wants to be more transparent,” says Michael Elias, managing director of Kennet Capital and chairman of the European Venture Capital and Private Equity Association’s high-tech committee. “But people must understand the reporting for it to be beneficial, whereas this just leads to more complexity” – and arguably confusion.

Elias’ argument is that blending the accounts of a business with, say, €100m in revenues and a €20m line of credit with a debtfree business that has €100,000 in turnover fails to distinguish between very different types of companies at varying stages of development. Private equity practitioners insist that this would be at best meaningless, at worst misleading.

In an attempt to head off such difficulties, the EVCA is lobbying for an exemption from IAS 27 for the private equity industry. It recently published a press release exposing the potential impact of consolidated accounting and arguing the proposal would ultimately be counter-productive in terms of transparency. EVCA has also been pleading its case to the European Financial Reporting Advisory Group (EFRAG), which was established in June 2001 to provide feedback to the IASB on its proposals. Elias is confident that an exemption akin to the one already won by US private equity firms from similar measures on the other side of the Atlantic can also be achieved in Europe. “We would be in a very odd situation if European funds were to look substantially different to their US counterparts,” he says.

However, others are less optimistic. One adviser to private equity firms says: “My concern is that although the IASB is aware of the issue, it has an awful lot of things on its plate. Private equity is only a minor consideration. Hopefully we can find a way to get round it, but I fear we won’t get an exemption in time, particularly as the IASB tends not to favour industry-specific exemptions.”

In that case, the private equity industry needs to be alive to the possible implications. Elias says few EVCA members were aware of IAS 27 prior to a presentation on the subject by its chairman Jean-Bernard Schmidt at the organisation’s technology investment conference in Amsterdam at the beginning of October. This needs to change: the message from EVCA is that, to avoid the imposition of a costly, unintended and unnecessary regulation, the industry must make its case now.

Deals & Exits

Inmarsat opts for Apax, Permira
After negotiations spanning almost 18 months, shareholders have finally recommended a $15 per share offer from Apax Partners and Permira for Inmarsat Ventures, the global satellite operator, in a deal which values the business at more than $1.5bn.

Apax and Permira have teamed up with management, led by CEO Michael Storey and Ramin Khadem, chief financial officer. The offer was chosen ahead of a rival bid from private equity groups Apollo Management and Soros Private Equity. The offer has been approved by Deutsche Telekom, Telenor and Xantic, representing just over 25 per cent of the company’s issued share capital.

“Inmarsat benefits from a substantial global business with a long heritage, a powerful distribution network, and prospects of growth driven by data services,” said Richard Wilson, who led the deal for Apax.

The debt financing for the transaction has been jointly arranged and underwritten by Barclays Capital, Credit Suisse First Boston and The Royal Bank of Scotland.

Spirit consortium wins S&N auction
Spirit Amber, a consortium led by two US buyout firms, Texas Pacific Group and Blackstone Group, and also including CVC Capital Partners and Merrill Lynch Global private equity, has beaten off competition from a range of private equitybacked bidders to acquire the UK pubs and restaurant estate put up for sale by Scottish & Newcastle earlier this year.

The £2.51bn price tag is to be settled on a debt and cash free basis and is more than £200m above the book value put on the business by S&N at the start of the auction process, which began in April. This followed S&N’s internal review that prompted the decision to focus on its international brewing operations. Merrill Lynch, Royal Bank of Scotland, Citigroup and Barclays have provided debt for the transaction.

Spirit beat off the challenge of two other final bids for the business – one from fellow pub chain Laurel backed by Cinven and another from Nomura, which bid alongside PAI Partners. Kohlberg Kravis Roberts, BC Partners and Terra Firma were among firms to express an interest earlier on in the auction process.

Doughty Hanson closes first French deal
Industrial battery maker Saft has become the first acquisition for Doughty Hanson since it established a Paris office in January 2003.

The office is headed by managing director Yves Duchesne, who said: “Saft is a high quality business with excellent growth and earnings potential. We are pleased to have acquired the business from a blue-chip French corporate and to have agreed our first acquisition in France, which we believe is a private equity market set to grow very strongly.”

The deal is also the first investment to come from the Doughty Hanson IV fund, which announced a first closing of €705m in September. It is subject to regulatory approvals but is expected to complete by the end of this year. CSFB is underwriting debt for the transaction.

3i acquires Refresco
3i has reached agreement with a group of European private equity firms over the secondary buyout of Refresco Holdings, a Holland-based drinks manufacturer.

The business is being acquired from a group of European private equity firms comprising Hay Hill Capital, NeSBIC, ISIS Equity Partners, CBG Commerzbank and Capiton. Debt financing for the transaction has been provided by SG Corporate & Investment Banking, Fortis Bank and ING Bank. “We were immediately impressed by Refresco’s management team and its results in recent years,” said Chris Williams, investment director at 3i London. “Refresco plays a leading role in [the European drinks] market and we are delighted to support its further growth both organically and through acquisitions.”

ABN AMRO Capital buys GGP for €555m
Global Garden Products (GGP) has been acquired in a secondary buyout by ABN AMRO Capital for €555m in a deal subject to regulatory approval. UBS Private Equity, which is focused on managing and realising its existing portfolio, hired Morgan Stanley to organise an auction of the business in April 2003. “The auction was very competitive and Morgan Stanley did a very good job for the vendor,” said Ian Taylor, managing director of ABN AMRO Capital in London.

Baroness submits winning Debenhams bid
Baroness Retail, the private equity consortium comprising CVC Capital Partners, Texas Pacific and Merrill Lynch Private Equity, has emerged victorious in its efforts to acquire Debenhams with an increase to its recommended offer for the UK department store chain.

Baroness has offered 470 pence per share, valuing Debenhams at £1.72bn. The revised bid is at a 3.3 per cent premium to the syndicate’s initial offer made in September.

Laragrove, the consortium comprising Permira, Blackstone Group and Goldman Sachs Capital Partners, said it would not be making a higher offer for the business. The winning offer emerged in late October after Goldman Sachs ruled itself out of a higher bid for Debenhams, which cast doubt over Laragrove’s ability to come back with another bid.

Texas Pacific and CVC each hold a 41 per cent stake in Baroness Retail, the acquisition vehicle set up to acquire Debenhams, with Merrill Lynch holding a 16.67 per cent stake. Debt facilities have been arranged and underwritten by Morgan Stanley and Credit Suisse First Boston.

General Atlantic exits debut German PIPE deal
General Atlantic Partners, the global private equity firm investing exclusively in information technology, process outsourcing and communications deals, has sold its stake in IXOS Software, the German-listed software group.

General Atlantic became the largest shareholder in IXOS in August 2002, acquiring a near 26 per cent stake in the business listed on the Neuer Markt of the Frankfurt Stock Exchange.

“The structure of this transaction for the first time will allow shareholders to choose between a pure cash offer and shares of the bidder,” said Freshfields Bruckhaus Deringer partner Ferdinand Fromholzer, who advised the firm on the initial purchase and subsequent sale. “This gives shareholders the opportunity to stay invested in the company while at the same time, accepting the offer.”

Bridgepoint completes €330m healthcare deal
Bridgepoint Capital, the London-based pan-European mid-market investor, has agreed to acquire Medica, a French healthcare provider, for €330m. The business, which was sold by the French state’s Caisse des Dép^ts et Consignations, becomes the latest in a succession of healthcare businesses to end up in private equity hands.

Medica has 87 homes and more than 7,000 beds and provides nursing home facilities to individuals requiring dependencerelated or post-operative care. It has almost 3,200 employees in France and is expected to turn over €210m in 2003.

Deutsche Beteiligungs exits Victorvox
Deutsche Beteiligungs, the German private equity firm which last month closed its latest fund, DBAG IV, on €228m, has sold its stake in Victorvox, a German telecommunications provider, to German group Drillisch.

Deutsche Beteiligungs made its original investment in Victorvox in 1999, taking a 25 per cent stake for an undisclosed sum. At the time of the deal, Victorvox, which was expected to list on the Neuer Markt in 2000, had a turnover of around €70m.

The sale, which is subject to approval by the German Cartel Office, is expected to be completed within the next few weeks. A spokesperson for Deutsche Beteiligungs said that exit multiples would not be disclosed until the transaction is completed.

CapMan buys DataVis stake in secondary
CapMan is hoping for a recovery in the IT sector after buying a 44 per cent stake in DataVis from listed Swedish private equity firm Ratos. CapMan has not disclosed financial details of the investment, which has been made from its Swedestart Tech fund, which closed in 2000 with €79.6m of commitments. Other CapMan funds may also participate in the deal in due course.

DataVis is quite a conventional IT consultancy that also owns an ASP business,” said Martin Falkevall, a partner at CapMan. “It’s been around for 15 years, has become geographically diversified within Sweden and has grown a nice customer base.”

Funds & Buyside

BPEP to launch buyout from ING
Private equity manager Baring Private Equity Partners (BPEP) is to launch a management buyout from parent group ING, as part of a plan revealed exclusively on

BPEP and ING insist that the agreement they have reached will result in a management buyout of the whole of BPEP “with the participation and full support of each of the senior partners of the firm”. There had been speculation about a possible break-up of the firm whereby some of the teams that currently manage regionally focused funds for BPEP would seek independence from the group.

Asked whether any of the regional funds may go their own way rather than participate in the buyout, a spokesperson said: “No. This is all about alignment of interests with our investors. It has been received positively and is seen as the next logical step for the business.”

Under the terms of the agreement, ING will not participate in any new fundraisings conducted by BPEP. But ING will retain its existing $360m of investments in BPEP funds, representing 18 per cent of BPEP’s total assets under management of $2bn.

The deal, which is expected to complete by the end of the year, follows a trend of financial institutions seeking to reduce their exposure to private equity. Said Alexander Rinnooy Kan, executive board member at ING Group: “While we still regard private equity as an attractive asset class, this agreement is in line with ING’s strategy to focus on our core businesses.”

General partners hold firm on fees
firm on fees The latest research shows that general partners (GPs) are reluctant to compromise with their fund investors, despite the harsh conditions of the last couple of years.

Strategic Capital Management (SCM), a Zurich-based private equity fund manager that has built up data on 1,000 funds and over 700 managers since 1998, found that the level of fees charged by GPs bears no relation to the size of the fund.

The management fee has shown no sign of coming down from its average of 2.5 per cent for venture funds and 1.8 per cent for buyout funds for funds up to $1bn in size. Carried interest has also remained static at 20 per cent.

Funds-of-funds were viewed as an exception, often providing lower fees, rebates for large commitments and flexibility in the combination of management fee and carried interest.

SCM chief executive Stefan Hepp, the author of the report, concluded: “…While the current tough fundraising environment suggests a buyers’ market for private equity investors, the terms and conditions are still biased towards the manager and thus investors should be careful when reviewing and negotiating agreements as they may not conform to market standards.”

European mezzanine surges
Mezzanine financing continues to increase its role in European LBO activity, according to a report published by UK-based Mezzanine Management and research firm Initiative Europe. The total value of deals that included mezzanine increased by 97 per cent in the first half of this year. In total, mezzanine investment in Europe more than doubled to €3.05bn compared with €1.28bn in the same period in 2002.

Mezzanine investment in Continental Europe has also grown significantly. Investment in France and Benelux has doubled and Southern Europe tripled as a percentage of overall market share. The UK remains the largest mezzanine market in Europe, accounting for 35 per cent of the total amount invested, with France and Germany accounting for 29 per cent and 21 per cent respectively.

This helps explain the success of Euromezzanine, the French mezzanine firm, in closing its fourth fund on €427m – exceeding a €400m target. French banks BNP Paribas and Natexis Banques Populaires returned as co-sponsors for the fund in addition to many of the firms existing investors.

Permira closes record buyout fund
After only six months of marketing, London-based private equity house Permira has closed Permira Europe III at €5.1bn, making it the largest buyout fund raised in Europe to date.

Charles Sherwood, a partner at Permira involved in the fundraising, said the firm had written a number of terms into the partnership agreement governing the fund that were intended to accommodate investors’ requirements for greater disclosure and transparency. “The position we’ve accepted, and which is reflected in our legal documentation, is that investors in the fund will have to reveal returns and performance in terms of cash flow, IRR and multiples,” said Sherwood. “Where we’ve drawn the line is disclosing the performance of underlying portfolio companies, which we feel would be damaging.”

A total of €875m came from Schroder Ventures International Investment Trust (SVIIT), a quoted fund manager, and its affiliated P123 vehicle that only invests in funds managed by Permira. Together, they accounted for 17.25 per cent of the total fund size.

Legal advisers to the fund were Fried, Frank, Harris, Shriver & Jacobson in Washington and SJ Berwin in London.

Blue Capital launches secondary fund
Further evidence of the continuing enthusiasm for secondary private equity investing comes with the news that Hamburg-based Blue Capital, a subsidiary of the HVB Group, Germany’s second largest bank, is launching a dedicated secondary fund. Blue Capital has launched a series of closed end funds and the fifth, the Blue Capital Equity II – Secondaries fund, has been marketed since October. The firm says it is targeting completion of the fundraising by the end of Q2 2004 and that the fund will have an estimated life span lasting until December 2010. As with previous Blue Capital funds it will target German private clients and institutional investors.

The fund will invest in no more than four secondary transactions and reports that it has already selected two funds it will invest in: BC Partners’ European Capital VII and the Carlyle Group’s Carlyle Partners III fund.

The fund is being advised by independent Munich-based private equity fundof-funds manager von Braun & Schreiber which was set up in October 1999 by the two founders of Allianz AG’s captive private equity fund-of-funds programme, Emmeram von Braun and Dr Gottfried Schreiber.

€560m first close for Clessidra
A first closing of €560m has been achieved by Clessidra Capital Partners, the new fund being raised by Italian private equity newcomer Clessidra Capital. Clessidra is headed by Claudio Sposito, the former chief executive of Fininvest, the holding company of Italian prime minister Silvio Berlusconi. The firm is targeting a final close of €1bn in the second quarter of 2004.

The fundraising has so far targeted mainly Italian financial institutions and has attracted commitments from the likes of Telecom Italia, Assicurazioni Generali, UniCredito Italiano, Mediobanca and Capitalia. This latest stage of the fundraising is being handled by placement agent CSFB Private Fund Group.

HMTF targets €1bn for Europe II
The newly-launched Hicks, Muse, Tate & Furst’s second European fund is expected to feature a number of terms designed to appeal to prospective limited partners. The US-based firm, which raised €1.5bn for its first European fund, is understood to be targeting €1bn this time around in light of tough fundraising conditions.

“We would be crazy to put out a number that we wouldn’t get,” said Lyndon Lea, partner in the firm’s London office, in an interview. “A number of fund targets that were not reached were set in a difficult environment a year ago, but we have factored in prevailing market conditions.”

Industri Kapital holds first close on €500m
Swedish private equity house Industri Kapital has held a first close of its latest fund, IK 2003, which is targeting a final close of €2.5bn next year. The fund has secured commitments of €500m at the first close, with HarbourVest Ventures, Pantheon Ventures, Swedish insurer Skandia and Scandinavian financial services group Nordea among the limited partners at the first close.

IK 2003 is the successor to the firm’s IK 2000 Fund, which closed on €2.1bn in November 2000. The fund will invest in mid- and large-cap buyout opportunities across Europe. The firm operates from offices in London, Hamburg, Oslo and Stockholm.

The firm has hired CSFB as placement agent for the fundraising and Clifford Chance will provide legal advice.

Danske closes second FoF on €527m
Danish private equity firm Danske Private Equity has held a final close of its second fund of funds, Danske Private Equity Partners II, on €527m. The fund had an original target of €600m.

According to a Danske spokesperson, the fund received strong support from existing and new investors. “All the investors are European, with the bulk coming from Northern Europe,” he said. Parent company Danske Bank and Danske Bank Life Insurance invested €50m each.

Danske PEP II has completed four fund investments to date: it is a limited partner in Leonard Green Partners’ $1.85bn buyout fund; Italian firm B&S Private Equity’s €550m IPEF IV; MPM BioVentures III, a $900m life sciences fund which closed in December 2002; and Nordic Capital V, which closed on €1.5bn.

EIF to lead German VC programme
The European Investment Fund (EIF) has secured its first third-party mandate, awarded by the German Federal Ministry of Economics and Labour (BMWA). Funds for the €500m facility will be provided on a 50/50 basis by BMWA and EIF.

This BMWA agreement is the first mandate that EIF will manage on behalf of a third party. Currently, EIF operates five venture capital mandates from both its capital providers: the European Investment Bank and the European Commission.

Investments will be split between seed and early stage funds focused on technology transfer (funds that have access to or cooperate closely with major public and private research centres) and funds that target follow-on financings for tech companies in their early, development and mid-stages.

“For the first time, EIF has received an investment mandate from a third party other than the EIB or the Commission,” said Francis Carpenter, chief executive of the EIF. “This is a natural extension of EIF’s present mandates and I hope we can strike other mandates with public or private investors in other countries.”


Moser follows Dunstan out of Terra Firma
Terra Firma Capital Partners confirmed that Matthias Moser, a German national and former financial managing director focusing on the German market, has left the firm, which is led by CEO Guy Hands.

On gardening leave until the end of the year, Moser is understood to be joining Eurohypo AG, the German mortgage lender and property investor that was created in 2002 and which is controlled by Deutsche Bank, Commerzbank and Allianz Group.

The departure comes shortly after Jennifer Dunstan, also a financial managing director and another senior figure at Terra Firma’s 70-strong team, left the firm for what it described as personal reasons. Earlier this year, Mark Tagliaferri also quit. Peter Middleton, an operational managing director, resigned 18 months ago, shortly after Terra Firma had gained independence from Nomura International, the Japanese bank.

Terra Firma’s remaining team of managing directors is made up of Charles Ewald, Quentin Stewart and Finlay MacFadyen, who have financial expertise, as well as Martin Angle, Mike Kinski, Joe Sinyon and Stephen Alexander, all of whom serve as operational executives.

PAI hires for London office launch
PAI Partners, the French private equity house formerly known as Paribas Affaires Industrielles, has hired Hamish Mackenzie as part of plans to build the firm’s profile in the UK.

Mackenzie, who joins the firm as a partner after six years as a director at UK-based Candover, will be located at the firm’s newly launched London office and will be in charge of PAI’s activity in the UK. He has been involved in the private equity industry for 13 years, initially with Royal Bank of Scotland Group (at its subsidiaries Charterhouse and Royal Bank Development Capital) for seven years, prior to joining Candover.

“London is a major financial centre where a large number of private equity transactions are originated,” said Amaury de Seze, chairman and CEO of PAI. “We have key investments in the UK and intend to take advantage of our sectoral expertise to further increase our presence in this market.”

Apax names new CEO
International private equity firm Apax Partners has announced that Martin Halusa is to replace Ronald Cohen as chief executive of the firm’s global operations.

Halusa will replace Cohen, who becomes executive chairman, at the beginning of 2004. The decision on a successor was made by the firm’s 22 shareholders, including six in the US.

Halusa, who will relocate to London, joined Apax Partners in 1990 and has led the Munich office since that time. He began his career at the Boston Consulting Group in Germany and left as a partner in 1986. He then joined Daniel Swarovski Corporation, first as president of Swarovski America and then as a director of the worldwide Holding in Zurich.

Sir Ronald Cohen confirmed earlier this year that he planned to step down from his position of chief executive. Cohen will take up the position of executive chairman in order to smooth the takeover by Halusa, although Cohen is expected to step down from the firm in 2005.

Henderson hires in Milan
Henderson Private Capital, the private equity arm of Henderson Global Investors, has hired Roberto Italia as a partner based at the firm’s Italian office in Milan.

Italia is a former partner and managing director at Warburg Pincus, which he joined in 1994, most recently heading the firm’s communications practice globally whilst also covering Southern Europe. Prior to this he was with the Telecom Italia Group. He relocated to Italy this year to focus on mid-market opportunities locally.

Italia will be responsible for investment activity in Italy and Southern Europe. “We are aware that there are many mid-market private equity investment opportunities in Italy and Southern Europe,” said Italia, “and our goal is to turn these into successful investments.”

Galileo builds investment team
Galileo Partners, the French venture capital firm launched in 1998 as part of the Worls & Cie group, has added Régis Saleur to its roster of senior investment professionals.

Saleur is the co-founder and former chief executive officer of SEEFT Ventures, a French venture capital firm focused on the software and high-tech markets. The firm was launched in 1998 and raised €23m for seed investments in the French market, and counted the EIF and FPCR (the French government-sponsored fund of funds) among its LPs.

In a statement, Galileo partner Joël Flichy said the appointment concluded the firm’s strategy of building an investment team of “seasoned partners”. The team also includes François Duliège, Jean-Michel Guichot, and Christophe Viet.

Isis appoints investment director
Isis Equity Partners, the fundraising UK private equity firm, has recruited Paul Morris to its new investments team based in London.

Morris joins the firm as an investment director after 18 years at Barclays, where he was most recently head of the South and London financial sponsors team at the bank’s leveraged finance unit. He completed 30 investments in midmarket transactions, including Benjys, Early Learning Centre and Salter Housewares since moving to the Barclays Leveraged Finance team in 1996.

The firm has also announced a series of promotions across the UK, including Mark Turner who has been made appointed director, portfolio management, after joining the firm as a portfolio director in 2001.

Dominic Ely and Liz Jones have also been made investment directors.

Pigache joins Henderson infrastructure team
Guy Pigache has joined Henderson Private Capital as the fifth member of its London-based infrastructure team. Pigache will join fellow partners Paul Woodbury and Andrew Marsden in managing the firm’s first European product, a high yield fund.

The Henderson Infrastructure High Yield Fund (Europe) aims to capitalise on growth in UK and continental European public private partnerships (PPPs). It will invest in the shareholder interests of operational PFI/PPP concession companies in Europe, with a principal focus on the more developed UK market.

Said Pigache: “Public private partnerships are a dynamic part of the European infrastructure market and I am looking forward to capitalising on this opportunity on behalf of our clients.”

Pigache previously managed European PPP infrastructure funds for HSBC and Grosvenor House Group. Henderson Private Capital had £1.5bn under management as at 30 June 2003. Its investment activities include management buyouts and expansion capital, infrastructure and fund of funds.