Four months after the groundbreaking IPO of KKR Private Equity Investors in Amsterdam, listed private equity funds are the talk of Europe again. Doughty Hanson has become the latest big private equity name to announce a listed vehicle, and has lived up to expectations of a new type of structure. At the same time, Partners Group has kicked off a fund-of-funds IPO. Mark Baker and Owen Wild report.
First it was KKR, then Apollo, now Doughty Hanson is to become the third major private name to list a co-investment vehicle, Doughty Hanson & Co Investments, with Citigroup and Goldman Sachs working on a €1bn flotation on Euronext Amsterdam.
Although it is not the first to come to market, the deal will nevertheless break new ground through its partly-paid structure. Bankers have already completed pilot-fishing on the deal, and a prospectus is expected to be published on Monday September 18. Roadshows will run for a little longer than two weeks, with pricing and listing in the week of October 2.
Despite speculation last week of a possible AIM listing, the confirmation of Amsterdam as the listing venue came as little surprise to bankers given the track record of KKR and Apollo.
“Amsterdam is a proven route, so why would anyone look elsewhere?” said one banker who is working on similar deals. Guernsey, where these funds have been based so far, was granted “adequate supervision” status by the Dutch authorities earlier this year.
Doughty is just one deal in a pipeline estimated by some to comprise more than 30 other names, with all the major private equity houses planning to jump on the bandwagon. The real interest, however, lies in the structure that the deals will adopt in order to mitigate investor concerns.
One of the main stumbling blocks for investors in fund listings is the speed of deployment of deal proceeds, since all the money is committed by investors up front.
Listing costs and fees also eat into the fund immediately, with the result that the fund trades below NAV from day one, and bankers have reported feedback along these lines from investors ever since the KKR deal.
KKR was able to get away with its structure and its extraordinary size – the deal was increased in size from US$1.5bn to US$5bn – because it had first-mover advantage. But any firms tapping the market now need to be conscious of an increasing wariness among investors of externally managed vehicles and other permanent capital deals in general.
For its part, Doughty will be committing €40m in cash to the new fund, a large part of which will be intended to pay the deal expenses. There will also be no vehicle-level management fee payable to for the first two years.
The logical solution to the deployment of proceeds problem is a form of part-paid structure, although this does bring its own hurdles.
According to one lawyer working on similar private equity fund IPOs at the moment, the main structures that firms are considering are: a part-paid issue (as seen in the UK in the past and also frequently in Australia); an initial issue of shares that mandatorily convert at a later date into higher-value shares; or an issue of shares attached to one or more series of warrants.
Doughty Hanson has opted for a part-paid issue, with investors paying 60% of the value now and 40% in 12 months’ time. According to the lawyer, the margin requirement provisions of the Securities Exchange Act 1934 mean that there can be difficulties with offering such a structure to US investors, since the second payment can be considered to be a loan.
But investment banks and lawyers have been discussing these structures with the SEC for some time, and the Doughty deal has been granted a “no-action” letter from the SEC. This permits the lead banks to market the offer to US investors on a rule 144a basis.
Doughty’s funds are all top quartile, and have performed strongly since the firm was established in the mid 1980s. The cash multiple on its private equity investments has been 2.6x, rising to 3x for its real estate investments. One investment in its technology ventures area – a much smaller part of the overall business – was exited at 4.3x.