European private equity firm Terra Firma is preparing an assault on two new areas of private capital markets – direct lending and direct secondaries – the firm has told PDI sister publication Private Equity International.
Both of the strategies aim to capitalise on the fact that across Europe there is a “huge field of play” in which companies with sound, deliverable business plans are “trapped” in funds that can no longer finance those plans because their investment period has come to an end, said Justin King (pictured), the firm's vice chairman and head of portfolio companies.
The firm will provide finance to those companies, either by lending to businesses on an individual basis or buy acquiring entire portfolios of assets.
King was speaking exclusively to PEI for an interview to be published online and in print on 1 July 2016.
Terra Firma recently withdrew its long-running lawsuit against Citigroup. Since 2010 the firm has been pursuing the bank for the £1.6 billion ($2.1 billion; €1.9 billion) it lost on its boom-era investment in music business EMI, for which it blamed Citi. While the fallout from the EMI loss has prevented the firm from raising a buyout fund since 2006, the firm says it has €1 billion of capital available for new transactions.
Operating under the internal moniker 'Support Capital', the direct lending activity is being spearheaded by credit veteran Peter Miholich, who joined the firm late last year.
Support Capital will provide the finance that sits between pure debt and pure equity, said King, adding: “You might call it 'Last In – First Out' equity, or 'first-call' debt”.
“We are uniquely well placed to do this,” said King, “because if you are going to be a debt provider to a business like that, you are going to have to take a view on how executable the operational plan is.”
Under the supervision of Michele Russo, who joined the firm earlier this year having previously set up a direct secondaries business in Milan, the firm aims to acquire portfolios of assets from funds at the end of their lives.
“This will be very attractive because you have a mutual trap: businesses are trapped with owners who can't support their business plans,” said King. “The owners are trapped because they can't support the business plan and don't want to exit, as they see themselves selling a lot of potential value. The GP is trapped because they are no longer collecting fees because the fund life has finished. Finally, LPs want liquidity.
“Michele has done that before and we think we are similarly well positioned to step in and take that GP role.”
The firm will continue to seek conventional private equity deals, as well as direct lending and direct secondaries opportunities. It will invest its own capital in transactions on a deal-by-deal basis and then invite investors to co-invest alongside it.