In what one partner involved calls a milestone transaction, secondary groups from two large private equity firms financed a secondary buy that established a new fund and financed that fund’s purchase of a buyout fund and its portfolio companies. The two secondary groups from London-based AlpInvest Partners and Boston’s HarbourVest Partners, invested $56 million in Paragon Partners’ Paragon Partners Secondary LP.
Munich, Germany-based Paragon Partners used the fund to buy the first fund of private equity firm Afinum as well as the three portfolio companies in the buyout fund. Paragon also has some of the $56 million investment from AlpInvest and HarbourVest left over for potential follow-on investments and add-on acquisitions. AlpInvest and HarbourVest contributed equally to the financing, which was finalized in January.
“It’s a first time that someone has bought an entire fund including the assets; not just in Germany, but I think globally,” says Wouter Moerel, a principal with AlpInvest. He says the European secondary market is a growing market that AlpInvest wants to increase its exposure to.
This marks the first time that Paragon has worked with either AlpInvest or HarbourVest on a deal. Paragon is a relatively new firm. It was founded in 2004 by founding partners Edin Hadzic, Kirschan Von Moeller and Stefan Winterling, who are all European private equity veterans. The firm has been putting deal financing together on a deal-by-deal basis and completed two deals prior to this one with financing from family offices and other institutional groups, including NRW Bank.
According to Thomson Financial (publisher of Buyouts), Afinum’s first fund closed in 2001 with $67.4 million. The firm has since raised a second fund, which has already made several commitments.
The three companies that remained in the middle market fund were: Kinsoher Greiftechnik, a German engineering company that makes attachments for excavation machines and other equipment; Riester, a manufacturer of medical diagnostic devices located near Stuttgart in Germany and Wohnprofil, a Swiss company that offers architectural and contracting services to home buyers.
Stefan Winterling says that the deal was an ideal transaction that will help Paragon further establish itself in the European secondary market. “For us it was an opportunity to accelerate our development and acquire great companies in one go,” says Winterling, who served with HgCapital and Apax Partners prior to co-founding Paragon.
He says that Paragon very actively manages all its assets and that they were able to secure the financing from AlpInvest and HarbourVest because they had an attractive group of companies specified. Paragon acquired controlling stakes in all three companies simultaneously as well as took over the Afinum fund that invested in each of them. He says that it was an easier transaction in some ways because there was only one seller, one negotiation and one contract. “The challenge is not to take any shortcuts in due diligence,” he says.
In the announcement of the deal, AlpInvest Managing Partner Volkert Doeksen said that the market for secondary direct assets is a growing segment of the secondary market that AlpInvest would target. Moerel says that AlpInvest currently has a pipeline of about 10 transactions with German and other European private equity funds that want to sell parts of their assets.
Paragon Partners targets the secondary direct mid-cap buyout market. It purchases controlling stakes in companies from private equity or strategic investors through secondary transactions. The firm prefers companies based in the German-speaking countries of Europe.