Before being taken over by ING Group in 1995, Baring Private Equity was a small European fund with between $200 million and $300 million under management. To coin a phrase, Baring sure has come a long way, baby.
The London-based private equity firm in March announced that its funds under management have hit the $2 billion mark. Moreover, while some private equity players struggled mightily to raise money in 2001, Baring managed to hold closes on three small, regional investment vehicles for a total take of more than $190 million worth of new capital for the year. In all, the firm has six regional private equity funds in every major market outside of North America, including Asia, Western and Central Europe, India, Latin America and Russia.
How did Baring buck the downward trend last year? Chris Brotchie, the firm’s chief executive, attributes its fund-raising success in part to the fact that nearly 75% of the capital comes from a core group of fewer than 40 institutional and high-net worth-investors. Moreover, 82% of the firm’s capital under management is contributed by third-party investors, with the remaining 18% coming from its parent, ING Group. And most of the firm’s existing limited partners also usually invest in more than one fund.
From Russia With Love
The largest of the three recently closed funds is the Baring Vostok Private Equity Fund, a Russia-focused investment vehicle that weighed in at a hefty $205 million at its final close in January. The oversubscribed fund was originally targeted at $150 million – a big fund for Russia, Brotchie says.
Still, he is confident the firm will have no trouble putting such a substantial sum to work in the nation. “We’ve been in Russia since 1994, and with our first successful Russia fund, we [garnered] a preeminent position in the country,” Brotchie says. “We’re the biggest game in town there.”
Historically, a majority of Baring’s investment activities in the nation have been focused on natural resources such as gas, oil and timber, and the new fund isn’t expected to stray far from that beaten strategic path. One big change, however, is that the firm is beginning to look at deals in the technology sector.
For example, Baring is currently considering a company with roots in the military arena that is developing a technology to neutralize airborne bacteria. The firm also is looking at a financial company with a software product that can be used to quantify systemic risk in the stock market. The Paris Stock Exchange currently is using the product on a trial basis.
To date, the firm has invested in the neighborhood of $50 million to $60 million out of the new Russia fund, Brotchie says.
Baring’s 2001 fund-raising activities weren’t limited to Russia. The firm also closed the Baring Central European Fund LP, and has already put to work almost all of the capital from the $80 million fund. In fact, the fund, which focuses on companies in Central and Eastern Europe, has just enough dry powder left for perhaps one more new investment, Brotchie says.
“For European investors and some U.S. investors, Central Europe is sooner or later going to be Europe,” he adds. “Poland and Hungary, for example, have the ability to join the European Union, and companies in Central Europe can be bought at half the price you would pay for an equivalent company in Western Europe.”
What makes the region particularly attractive to buy-and-build investors like Baring is that they also have the opportunity to buy up the best of these companies on the cheap and consolidate them, making a stronger entity that has the capacity to capture a larger share of the market. “You can buy a company in Hungary and a company in Poland, for example, and merge them together to get critical mass and develop the value of your investment,” Brotchie explains.
With its Central Europe fund almost fully invested, the firm will likely be back in the market to raise another European fund sometime in 2003, he adds.
To The Far East
Reflecting Baring’s interests beyond the European Continent, the firm also is in the midst of marketing a second, Asia-focused fund. Launched in 2000, the $400 million-targeted Baring Asia Private Equity Fund II LP held a first close in December, garnering $200 million in commitments.
Although the fund isn’t expected to hold a final close until June, Baring has already put more than $100 million to work in new investments. Most of the portfolio includes mature technology companies, especially those involved in high-volume manufacturing of sophisticated products such as the electronic components used to wire “intelligent” buildings. The fund also will invest in software services companies, most of which are located in India.
“India has a huge supply of very talented software engineers who, working for American and European companies, can do the job cheaper than an American or a European,” Brotchie says. “We like it a lot because these companies have 80% to 90% U.S. dollar or Euro revenues, whereas 85% of the cost is denominated in rupees. We have a natural hedge on the currency risk there.” ($1 = 49 rupees, and EURO1 = 43 rupees, Ed.)
Baring’s investment sweet spot includes companies with an enterprise value of between $20 million and $200 million. The firm counts 160 companies in its portfolio, and has approximately $700 million in uninvested capital, which is more than adequate to finance new companies under current market conditions, as well as provide reserves for existing portfolio firms, Brotchie says.
“We’ve compounded the growth of our existing funds under management at a rate of more than 30% per annum,” he adds. “The $2 billion milestone is where we can catch our breath and consolidate the business and focus on getting companies sold as the markets improve.”
Ranked as the top private equity firm in the world for number of countries covered, Baring has 65 investment professionals in 21 offices in 17 nations. While the firm has no immediate plans to hire any additional staffers, Brotchie says Baring is well-positioned to benefit from a shakeout and consolidation that will likely manifest itself in the European private equity market in the coming months.
“Quite a few investment teams are shaking loose from their parent organizations. We’ve never seen so many people looking for a more stable home,” he adds. “We’re keeping a watchful eye on the market. There are going to be some very talented people on the street.”