Kreos Capital, a London-based growth debt fund manager focused on Europe and Israel, has started investing its €700 million Fund VI, having beaten the target set for the fund by a €100 million margin.
The fund, which took around six months to raise, is significantly larger than the predecessor Fund V, which closed on €400 million in January 2016. Funds III and IV raised €200 million and €240 million respectively.
Now in its 20th year of operation, over which time it has committed more than €2.3 billion to 540 deals, Kreos says it is seeing a strong deal pipeline from which it expects to commit around €250 million to €300 million annually, selecting about one in ten of the deals introduced from its network of European equity sponsors. The prior fund was deployed in just three years, compared with four years for the funds before that.
Kreos supports growth deals involving private equity sponsors and invests between €2 million and €50 million per deal, with the average ticket just under €10 million. The firm’s two main target sectors are IT and healthcare, with deals diversified by stage and country. Between a third and a half of the firm’s investments are re-ups into existing portfolio companies.
The latest fund includes a range of sovereign wealth funds, university endowments, foundations, pensions, insurers, supranational funds, family offices and asset managers. Kreos declined to identify any individual LPs. Placement agent Azla Advisors helped raise the fund, which has a “low-teens” target IRR.
General partner Aris Constantinides told PDI that larger LPs, which had watched the development of the business, were investing for the first time now it could support €100 million tickets. He said many had built up their core private debt allocations and were now looking for strategies to provide alpha.
Commenting on the resilience of Kreos’s model in any weakening of market conditions, general partner and chief operating officer Simon Hirtzel said: “We have been through two down cycles before and we know that alongside crisis there are also opportunities when funding becomes scarce.”
The firm does not typically include covenants on its deals. “The key for us is providing operational flexibility,” says general partner Ross Ahlgren. “Covenants are important where you have PIK, bullets or non-amortisation for many years. But our deals amortise and we give management flexibility so they are not constrained. The best covenant is cash, and we get paid back on a monthly basis.”
The size of the Kreos team has increased by half since the start of its prior fund three years ago and recently made its first internal promotion to partner, with Sean Dunne making the step up from principal having joined the firm six years ago from Lloyds Banking Group.