HgCapital smashes target

Mid-market specialist HgCapital overshot its target for its latest fund by £200m. Tom Allchorne examines the fund and looks at how it was raised in an already crowded marketplace.

HgCapital has closed its second fund since spinning out of Merrill Lynch in 2000, exceeding its £750m target by raising £950m, the maximum size agreed with investors. The fund took over four months to close, from its formal launch in late October 2005, and beat its target on first closing on £850m in January. Like its predecessor funds, the firm’s latest vehicle will focus on mid market companies, and investing between £25m and £250m per deal, in companies with enterprise values of £50m to £350m in six specific sectors: consumer, healthcare, industrials, leisure, media and technology.

HgCapital’s first independent fund, when it was still known as Mercury Private Equity, closed in 2001 after launching the previous year. MUST 4, as it was known, raised a total of £700m through several pools of capital, including limited partnerships, segregated clients and an unfixed allocation for HgCapital Trust, the firm’s listed vehicle. The fund is almost completely invested. According to Thomson Venture Economics, the fund has invested in 36 companies and had made 19 exits.

With HgCapital 5, almost all the investment is by a fixed LP allocation, apart from a certain amount by HgCapital Trust. The fund has over 50 LPs, including Gartmore, Goldman Sachs, Harvard Management, Ilmarinen, LGT, Metlife, Morley, Pantheon, Rolls Royce, Standard Life and Texas Teachers. Craig Donaldson, partner and head of client services at HgCapital, said this fund was better diversified in terms of LPs’ geography, type and size.

“The capital markets were interesting,” he says, comparing the fundraising for HgCapital 5 with MUST 4. “Then they were in a poor position, they were under lots of pressure from other investors, but when we returned with our new fund, we found them much stronger. We were one of the last ones to go out fundraising and still exceeded our target.”


HgCapital 5 enters a market many argue already has more than enough players. In 2005 a whole host of mid market buyouts funds successfully closed; Electra European Fund II raised €1.25bn, ATP Private Equity Partners II raised €1bn, Industri Kapital raised €900m, Lion Capital closed its first fund on €830, and AXA closed its third LBO fund on €500m. And these are just some of the high profile ones.

Donaldson outlines how HgCapital made itself stand out from the crowd. “We tried to be very clear about what the strategy is,” he says, “and explained that we have a particular set of tactics that we use to execute that strategy, which results in investor returns throughout the life of the investment. It was not a random, general process; it was an organised, focused one.”

One of HgCapital’s selling points is its sector specialisation. “First we take a look at the whole of the economy and at the various markets and then slice it into the appropriate sectors, just as the public markets do, and then we assign dedicated teams and then those teams are responsible for just that sector,” he says.

Ian Armitage, partner and chief executive of HgCapital says: “Our goals are simple: we want to be the best investment partner in the mid-market, for clients, management teams, vendors and advisors, and we are dedicated to continually exceeding their expectations. This industry has always been competitive and while the path to generating strong returns may at times seem less apparent than in the past, we believe HgCapital has the people and processes in place to find and develop value in our investments.”

Credit Suisse acted as sole placement agent and SJ Berwin, together with Ropes & Gray, which acted as legal advisor.