Hermes Pensions Management Limited (Hermes) is stepping up its private equity activity with an agreement to acquire up to 21% of Botts Holdings, the parent company of Botts & Co., a private equity fund management and investment company. The investment in Botts will significantly increase Hermes’ capacity and access to deal flow in direct private equity.
Botts is in the process of fund raising for Botts Capital Partners 2 (BCP2), the successor to BCP1, a GBP155 million limited partnership raised in December 1998.
The BT pension scheme, advised by Hermes, aims to invest up to GBP35 million in BCP2 which has a target of between GBP300 million and GBP350 million and anticipated first and second closing dates of June and November this year.
BCP2 is investing in Western Europe, primarily in the U.K. and Germany. The average size of investments will be between GBP10 million and GBP25 million. Areas of investment focus include leisure and entertainment, branded goods, industrial products and services and media.
For Botts, Hermes’ support is a transforming event for the company and will enable the firm to take advantage of the rapidly increasing demand for buyout and expansion capital in Europe, particularly in the middle market. Botts & Co. currently manages GBP250 million of discretionary private equity funds. With offices in London and Munich, it has provided development and expansion capital for medium sized MBOs and MBIs, restructurings and public-to-private transactions since 1990.
Tony Watson, chief investment officer of Hermes, will join the board of Botts. He sees the investment in BCP2 as an excellent opportunity for Hermes’ clients to be a cornerstone investor in a private equity fund managed by a team with a strong and established track record. Watson is fairly confident about fund raising in the current climate. “Obviously times are difficult at the moment, but we wouldn’t have set our sights at GBP300 million if we didn’t think we could do it. We feel confident that we can get it,” he said.
The commitment in Botts is part of the private equity programme for the BT pension scheme, which has increased its commitment in private equity to 3% of its total equities of GBP700 million. BT pension scheme, said Watson, is only half way through that programme. Private equity investments are split with 60% targeting funds and the remaining 40% in direct investments. Investments in the fund category are designed to increase deal flow on the direct investment portfolio.
Watson sees the advantages of gaining a management team when investing in funds, rather than having to source deals internally. He also says that cross fertilisation between funds is a possibility: “Part of the exercise is to increase deal flow. We will obviously have co-investment rights in funds the advantage is that Hermes will see all opportunities that Botts sees.” He continued: “The trustees of the BT Pension Scheme have decided upon a specific private equity programme. By investing in BCP2, the scheme is well on the way to fulfilling its goals and also gaining access to a deal flow that it otherwise wouldn’t see. The programme is reflective of how private equity fund managers work and sit together.”
Hermes is the principal investment manager for both the BT and Post Office pension funds, which bring Hermes’ total funds under management to around GBP50 billion. Hermes is ultimately owned by the trustees of the BT Pension Scheme and manages over GBP750 million in private equity on behalf of its principal clients.
Earlier this year, Hermes launched the UOB Hermes Asia Technology Fund, with a target of $150 million. The fund is the second investment vehicle through the joint venture set up between the two companies last year.
And late last year Hermes acquired the 25% of Hermes LENS Asset Management (HLAM) from LENS Investments that it did not already own. Hermes and LENS Investments set up HLAM as a joint venture in 1988.