Deutsche Bank Sells Portfolio for $1.6B

Through a management buyout backed by a multitude of private equity investors, newly formed MidOcean Partners recently acquired the late-stage private equity portfolio of Deutsche Bank’s DB Capital Partners (DBCP) for $1.625 billion. This is the largest secondary buyout ever, topping Coller Capital’s $1 billion purchase of the former National Westminster Bank portfolio in 2000.

Aside from a 20% stake in the portfolio retained by Deutsche, $1.165 billion of the remaining equity was fronted by a seven-member syndicate, which includes NIB Capital Private Equity, Ontario Teachers’ Merchant Bank, CPP Investment Board, HarbourVest Partners, Bregal, The Yucaipa Companies and Paul Capital Partners. Of these, NIB and Teachers’ Merchant Bank account for the largest stakes, with each firm investing approximately $360 million.

Coller Capital, Northwestern Mutual, and Presidential Life, along with management, contributed the remaining equity, totaling approximately $130 million.

The management buyout team was led by Ted Virtue, CEO and managing partner at DBCP. Virtue is managing partner of MidOcean and was joined by partners Charlie Ayres, Graham Clempson, Diurmuid Cummings, Deborah Hodges, Christian Purslow, Rob Sharp, Frank Schiff, Graham Thomas and Tyler Zachem. In total, 38 DBCP employees made the jump to MidOcean, and the new firm began operations Feb. 21.

Given the rumors regarding J.P. Morgan and UBS Warburg looking to divest from their own private equity funds, Deutsche’s sale may be a harbinger of things to come. “Private equity [funds] are not in the core business plan of these large institutions,” says Tim Jones, an investment director with Coller Capital. “With the volatility in the last few years, don’t be surprised if we see more transactions of this size involving the big banks over the next year or two. The banks will refocus on being lenders.”

Jim Leech, a senior vice president with Teachers’ Merchant Bank, agrees. “DB was first [in selling its fund], and we think others will follow suit,” he says. “Some of these banks have used private equity investing, in effect, as a loss leader for investment banking fees and to gain access to deal flow, but the companies in Deutsche’s portfolio are investments that [Virtue and Clempson] would have made standing on their own.”

“The regulatory environment and the higher capital charge for private equity and other illiquid assets have been catalysts for many banks looking to lighten their exposure to the asset class,” Virtue says. “The perceived conflicts to third-party investors of being owned by a bank goes away. That was not the case at Deutsche, but that concern was still out there.”

Deutsche’s portfolio includes over 80 private equity investments in Europe and the United States, including Center Parcs and United Biscuits in Europe and Prestige Brands in the United States.

“We were attracted to the diversity of the portfolio. United Biscuits and Center Parcs are two extremely attractive franchises that attracted NIB,” says Iain Leigh, a managing partner with NIB, who adds that the deal began to take shape when Virtue approached NIB in August 2002.

Coller also came in on the deal because of the portfolio’s diversity. “This fund is a healthy mix of European and U.S. investments. When [Virtue] contacted us, we were delighted to become a partner in the transaction,” says Jones, who declined to discuss the size of Coller’s investment in the MidOcean buyout of Deutsche’s secondary portfolio.

Virtue anticipates MidOcean exiting some of the larger companies in the portfolio within the next 18 months, and to “return a significant amount of capital to our investors.”