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Permira's get-out clause

The future of big buyout funds may be uncertain – but they haven’t gone the way of the dotcom venture funds yet, writes Philip Borel.

Inevitably perhaps, Permira’s decision to give LPs the option to scale back their commitments to the firm’s €11.1 billion 2006 fund is being compared to the 2001 phenomenon of brand-name VC groups releasing investors from their promises to invest in billion-dollar technology funds.

But there is a difference.

Back then the dotcom bubble had burst, and the VCs reacted by saying there was simply no way to invest their very large funds in early-stage technology companies. Today the credit bubble has burst and brand-name managers of buyout funds are facing questions about their ability to invest their very large funds. But that is not why Permira is offering its investors a get-out clause.

Philip Borel

Indeed the firm hasn’t said anything about its fund no longer having the right size. Everything that is known about the firm’s thinking at the moment suggests it wants to leave the fund as large as it possibly can. A little more than 50 percent drawn two years after closing, the fund still has a couple of years left to invest the remaining capital. Leverage is now in short supply, yet still Permira appears confident this can be done.

Hence the onerous terms it demands of anyone wanting to reduce their stake in the fund today: full management fees on the original commitment and a 25 percent cut in the fund’s profit distributions. Permira clearly wants as little take-up of the offer as possible, and it has said it expects few investors to go for it. 

“The point of the proposal is to balance the interests of those investors who want to continue with their original exposure to the fund, and those who feel they must adjust their commitments,” a Permira spokesman said on Friday. Clearly the firm believes the former group to be in the majority.   

Meanwhile there are several other big buyout groups sitting on un-invested capital as well. Some of them may yet decide to shrink their funds by reducing the commitment of every LP pro rata. This hasn’t happened yet. The future of big buyout private equity may be uncertain at this point – but it hasn’t gone the way of the dotcom venture funds yet.