China’s sovereign wealth fund, China Investment Corporation (CIC) is backing European buyout house Apax in an innovative two-part transaction which will see CIC acquire a 2.3% stake in Apax for an undisclosed sum and also purchase a stake in Apax Europe VII, the firm’s €11.2bn fund closed in 2007. The deal is expected to value the buyout house at around US$5bn.
CIC was established in 2007 with the issuance of special bonds worth RMB1.55 trillion by the Ministry of Finance. These were, in turn, used to acquire approximately USD200bn of China’s foreign exchange reserves and formed the foundation of its registered capital.
The first part of the deal involves the sale of a 2.3% stake in the Apax Partners management company following a previously agreed deal to sell 7.7% to the Government of Singapore Investment Corporation (GIC) and The Future Fund of Australia last year.
The proceeds of this sale will be re-invested into a Permanent Capital Vehicle (PCV), the principal objective of which is to invest in future Apax Funds. This has two clear advantages for Apax: it irons out some of the vagaries of the fundraising cycle and it means that, by being a significant investor in its own funds, Apax will be more closely aligned with its LPs.
According to a source close to the firm, “By having three of the largest and most sophisticated global investors in the firm’s capital structure it hopes to establish a strong long-term relationship which will see them become cornerstone backers of subsequent funds and also assist us in these strategically important areas.”
The second and more innovative part of the transaction sees CIC become an investor in Apax Europe VII. This investment takes the form of the acquisition of unfunded commitments from existing investors up to a value of €850m.
This is advantageous for CIC because it gives it access to the unfunded portion of a closed fund at what is, potentially, a very attractive time in the cycle. CIC won’t be exposed to Apax’s previous deals in the fund and returns will only be calculated on deals made after it has invested in the fund.
It is a good deal for Apax because it is a huge vote of confidence in the firm’s strategy and team and enables the firm to offer its investors a unique liquidity option.
Finally, it is a good deal for those investors who need to sell because they are able to sell their unfunded commitments at par. In the past, the only options have been to sell commitments in the secondary market or default. This is clearly a better option for those with allocation or liquidity issues.
This is not CIC’s first foray into private equity. The fund invested US$3bn in Blackstone before the private equity bubble burst and badly got burned. Here’s hoping this time round the experience is a lot less painful for the fund.
Apax Partners is an established player in the global private equity market with over 30 years’ experience operates across the US, Europe and Asia. Funds under the advice and management of Apax Partners globally total around US$40bn. This week the firm announced the acquisition of Marken, a pharmaceutical support company, from Intermediate Capital Group PLC for a reported £975m, making it the largest European private equity deal for over a year, according to industry sources.