Terra Firma buys out ailing investors

Terra Firma Capital Partners has joined the likes of Permira, TPG Capital and Candover in changing the limited partner base of its latest fund, Terra Firma Capital Partners III, which raised €5.4bn in June 2007.

Guy Hands, the outspoken head of Terra Firma and a former investment banker at Nomura and Goldman Sachs, is understood to have approached all 170 investors in the vehicle regarding their ability to fulfil commitments, with three choosing to sell their €50m positions.

The names of the limited partners are not known, but are said to have been two large institutions and one family-owned group. Terra Firma declined to comment.

As a result, Hands will be personally liable along with other key partners for the remaining €25m of undrawn capital calls. Terra Firma itself already has a €200m commitment to Terra Firma Capital Partners III, with Hands having declared a personal injection of €40m, according to a private placement memorandum for Fund III.

The selling fund investors are reported to have sold at discounted prices but more attractive terms than would have been available on the secondary market, which may have also saddled Terra Firma with less appealing limited partners, especially in terms of future fundraising.

Commitments for Terra Firma Capital Partners III included previous investors Adams Street Partners, AlpInvest Partners, Canada Pension Plan Investment Board and Partners Group, as well as Allianz Private Equity Partners, CDPQ, Citigroup, Gartmore Private Equity, Horsley Bridges, OMERS, Standard Life, TIAA-CREF and the State of Oregon.

Investors in Terra Firma Capital Partners II, the firm’s debut fund as a standalone entity following its spin-out from Nomura in 2002, included Wilshire Associates, NIB Capital, the Abu Dhabi Investment Authority, the Government of Singapore, Northwestern Mutual and GE Structured Finance. Nomura put in about 10% of the fund as part of the spin-out agreement.

TFCP II raised €2bn in early 2004, a record-breaking amount for a European general partner at the time, with Hands putting in £20m of his own personal fortune. By mid-2005, when Fund III was in early marketing, Terra Firma’s historical return on profits was understood to be €8bn, generating an internal rate of return of 49% and a two times cash multiple.

TFCP III has already made a significant investment in EMI, the music group bought for £4bn in 2007, shortly before the onset of the credit crunch. A regulatory announcement at the time said that the fund would put up to £1.47bn of equity into the deal, alongside a £350m overdraft for working capital alongside debt financing of £2.5bn.

In addition, Irish aircraft leasing business AWAS, a US$2.5bn Fund II investment, bought Pegasus Aviation France for US$5.2bn in May 2007 with reported equity capital of US$900m from Fund III.

Unlike its peers, however, Terra Firma chose not to shrink the overall size of its fund. In December, Permira announced that it had returned to its limited partner base with the option for investors to reduce commitments for uncalled capital.

The London-headquartered global buyout firm said that its projected €11.1bn fund – its largest to date – would be no less than €9.6bn in size, with 90% of investors sticking to their original commitments, and the main change involving SVG, one of Permira’s longest-running fund investors, shifting its commitment from £796.3m to £343.8m.

Shortly afterwards, TPG Capital said that it would return 10% of the US$20bn of capital it raised last year and lower its management fees. Earlier this month, Candover said that it would shrink the size of its fund, which was targeting €5bn, but had only raised €3bn since marketing began last March. A second close of €2.8bn was completed last August.

Of that €3bn, Candover itself had committed to provide €1bn, which a statement from Candover Investments said would be “significantly reduced”. As Candover previously raised a €3.5bn fund in 2005, this may be one of the first examples of a large buyout firm, generally regarded to be among the top tier, reducing the size of a successive fund, at least in recent times.

Another listed investor, 3i, has had a similarly difficult 2009 to-date, although it has taken a different route regarding its funds. Following January’s resignation of chief executive Philip Yea, 3i has sold a £60m stake in 3i Infrastructure, which was listed for £700m in 2007 and offered to take private 3i Quoted Private Equity, which raised £400m for direct investments in public equities in mid-2007.

The 3i Infrastructure shares sold amount to 9.5% of the issued share capital, leaving 3i Group with a remaining 33.3% stake. Michael Queen, former head of 3i Infrastructure, replaced Yea, with chairman Baroness Hogg filling his position, although it has since been announced that she will step down next year.

The shares sale came just days after it was revealed that 3i Infrastructure had pulled out of a planned joint venture with Ontario Teachers’ Plan and Canada Pension Plan to buy Gatwick Airport from owner BAA. Reports suggested that 3i had balked at the price tag, while a 3i spokesperson denied that the listed fund had been unable to source debt financing for a mooted £1.65bn to £2bn deal.

3i will effect the purchase of the 50.1% of 3i QPEP it does not own through a mixture of cash and new 3i Group shares in a transaction that values the entire issued share capital at £355.2m, a premium of 32.6% to its closing price on February 19 2009.