Read Full Article (PDF)

10 | IFR BUYOUTS EUROPE | April 12 2007 FEATURE

As Blackstone and other big buyout firms consider listing their management companies, Robert Venes looks at 3i, one of Europe’s longest-listed private equity PLCs. LISTED FIRMS LISTED Making the list

espite fevered speculation in the on how Blackstone’s decision will affect its activities and its pay structure is uncer- press as to which financial investor it and some of its big buyout firm peers’ tain, with some analysts suggesting Dwill follow Blackstone Group’s notorious affection for privacy, in partic- Schwarzman and his partners will ensure recently announced decision to go public, ular the profits it nets from its roughly the flotation is carried out in their best these are not uncharted waters for private US$55bn of investments. interests. equity firms. “There is nothing new or “They’re going to structure themselves unique about listing a private equity man- “They’re going to where the new nuances won’t be harm- agement company or fund,” says Mounir ful to their development and won’t add Guen, head of placement agent MVision. structure themselves extra layers of complexity or visibility,” Indeed, the firm’s decision not only where the new nuances says Guen. follows some amusingly timed comments 3i, which was listed in 1994, has already from Stephen Schwarzman, Blackstone won’t be harmful to their been through this in full view of the pub- co-founder and the firm’s public face, development and won’t lic gaze. regarding the public markets (“overrated” Just a few years ago, the firm was suffer- and not a viable source for capital), but add extra layers of ing from the aftermath of the dotcom also the listing in February of Fortress bubble, top-heavy with technology ven- Investment Group. complexity or visibility.” ture investments but increasingly light on That flotation itself followed Kohlberg executive talent. Known by many as the Kravis Roberts’ US$4.8bn IPO of its KPE Pri- university of venture capital, 3i had seen vate Equity Fund Investors last March, a Mounir Guen many of its staff leave for better remuner- move that Schwarzman said at SuperRe- ation elsewhere, with the most high-pro- turn in February “destroyed the market Private equity firms charge between file departures being Richard Campin, for anyone else”, suggesting his rival had 1.5% and 2% of a fund’s total in manage- Chris Graham, Hugh Richards and Tom soaked up all available liquidity. ment fees – Blackstone is understood, Sweet-Escott, who set up their own firm, KKR’s decision meant the public could like many of the bigger funds, to charge Exponent Private Equity, in early 2004. participate in private equity’s boom, approximately 1.5% – and then takes a 20% In July of that year, Philip Yea took over investing directly into a buyout fund and cut of profits in performance fees once its from Brian Larcombe as chief executive, its underlying investments. As Schwarz- exit strategy has hit its hurdle rate of the first to be recruited outside of the firm, man suggested, no private equity firm around 8%. having previously headed up Bahrain- has followed by listing a buyout fund on These terms and conditions have based Investcorp. One of Yea’s first changes the public markets since. become established over the years – with was to 3i’s pay structure, providing com- However, at around the same time, one US general partner recently quip- pensation for executives’ investments. alternative asset manager Partners Group, ping that they came over with Columbus “Historically, 3i had been criticised for not which has SFr17.3bn (€10.6bn) of under- – and have played a significant factor in being to market in terms of compensation lying private equity assets, was floated on retaining executive talent from one fund to executives relative to peers at more tra- the Swiss stock exchange, joining the to the next. ditional LP/GP models,” says Douwe Cosijn, likes of American Capital (and its London As the industry has come under further head of investor relations at 3i. “Since and Paris-based subsidiary, European Cap- scrutiny, though, some have questioned Philip Yea came on board in 2004, our com- ital), Sweden’s CapMan, Paris-listed the relevance and fairness of a manage- pensation structures are to market, work- Eurazeo and mezzanine provider ICG and ment fee – Blackstone’s latest extended ing largely on a 2 and 20 basis. Everyone gets 3i in the UK as private equity PLCs. fund totals about US$20bn, resulting in a carry and stands to do well.” Like those, Blackstone is listing its man- management fee of some US$150m. Clear- According to Cosijn, compensation is agement company, a decision that some ly, this is enough to put food on the table disclosed for 3i’s board members, but the reports suggest required Schwarzman to for its partners. firm doesn’t provide details on the salaries persuade key partners as to the benefits. How transparent a listing of Black- of individual investment executives. As for Media attention has been quick to focus stone’s management company will make shareholders, third-party investors in its April 12 2007 | IFR BUYOUTS EUROPE | 11 FEATURE

buyout funds (limited partners) share in capital deals there almost from day one, a period where we are not meeting those the profits alongside general partners, whereas with a traditional fundraising it objectives, we expect to have a grown up while the strength of the underlying can take 12 to 18 months, giving us com- conversation with our investors.” assets provides a better share price for petitive advantage.” Being the grown up is clearly where 3i investors in the public entity, who also More recently, 3i has also moved more sees itself in the current climate and Cosi- received dividends, such as the £800m in line with its traditionally funded peers jn is confident that private equity’s

LISTED FIRMS LISTED announced in the group’s pre-close by extending the amount of third-party increasing maturity and ability to out- announcement last month. commitments to its buyout vehicle, as perform public markets will ensure that well as following the industry’s trend of others follow Blackstone onto the world’s “Permanent capital is ever-larger fund sizes. stock exchanges. what you get when you In November of last year, 3i held a final close on its fifth buyout vehicle, Euro- “Almost 700 funds become a listed vehicle. fund V, having raised €5bn, Europe’s closed last year and we So if you look at what 3i largest mid-market buyout fund. 3i is understood to have provided about 55% of dealt with 12 full can do with a balance the capital from its own balance sheet, with the remainder coming from some 62 closings. You’re not sheet of over US$10bn, institutional investors. going to see 700 firms we were able to get a “3i started raising third-party funds only in the buyout space,” adds Cosijn, “as go to the public market, team up and running in it enables us to take majority positions but you might have one India that was without having to consolidate assets on the balance sheet. That’s important as or two, most likely at established over a what it does is give flexibility, while also the large end.” relatively brisk period of enabling them and us to benefit from the strong deal flow that we generate.” time with the advantage Last month, 3i extended its faith in the Mounir Guen of 3i underwriting the public markets by floating an infrastruc- ture investment business, raising £700m, business and its albeit at the lower end of its targeted £700m to £1bn range. The firm subscribed integration.” to 325m shares, representing 46% of the “There will be more, it’s not a fad as company’s ordinary shares. public markets are clearly looking to “The fund is well aligned to shareholder access that out-performance, not just in Douwe Cosijn interests as infrastructure is by nature long private equity but also hedge funds and term and stable with 20 to 30-year con- other alternative assets,” he says. Being listed, says Cosijn, also lends the tracts,” says Cosijn. “The scrutiny of the industry will firm credence in longevity over rivals A listed firm and fund’s ability to tap the become an important theme as it moves that operate funds with 10-year life-spans capital market as an evergreen source of from a boutique niche to a mainstream and a reputation that could prove invalu- funding could also prove invaluable dur- asset class. Having a peer group of listed able at a time when the industry is very ing less buoyant parts of the cycle, he adds. private equity companies should make the much under the microscope. “Investment and divestment rates are valuation debate of private equity firms “Given our history of being listed on the best left to the investment teams rather much richer and should put the broader stock exchange and fully regulated, we are than the mechanics of the portfolio,” says industry on valuations that are in line well prepared to deal with the spotlight of Cosijn. “Within the context of a 10-year with the return objectives that this indus- the public markets,” says Cosijn. “Our man- fund with a three-year investment and try has demonstrated over the medium to agement team invests a lot of time in ensur- seven-year divestment period there is long term,” says Cosijn. ing our relationship with the public clearly pressure on general partners to Guen, on the other hand, isn’t so sure, markets are open and transparent and that return assets, which is not a dynamic saying: “Almost 700 funds closed last year there is a real expectation and understand- that comes into play when you have a per- and we dealt with 12 full closings. You’re ing in the City of what 3i should be doing.” manent vehicle and can take a longer- not going to see 700 firms go to the pub- Not only that, the firm can also deploy term view on assets. There isn’t the lic market, but you might have one or two, capital at a faster rate than its traditional pressure to make realisations and distrib- most likely at the large end.” peers. ute back proceeds the way you would in As for Blackstone, Cosijn has little doubt “Permanent capital is what you get a traditional buyout fund,” he says. that it will transfer its success as a private when you become a listed vehicle,” says “It’s very important to 3i in our engage- entity to the capital markets. Cosijn. “So if you look at what 3i can do ment with the capital markets that we “Blackstone has a phenomenal track with a balance sheet of over US$10bn, we ensure we are open and transparent about record and experienced management were able to get a team up and running in our performance and what shareholders team, and while listing will be a new chal- India that was established over a rela- expect from us across the cycle, especial- lenge and a move into the spotlight, they tively brisk period of time with the advan- ly in terms of our return objectives,” says are a smart outfit that will adapt in due tage of 3i underwriting the business and Cosijn. “At present, we have been outper- course to meet the demands of public its integration. We were able to do growth forming, but if the cycle turns and there is markets,” he says.