Nobody said raising a fund would be easy, but for the Guy Hands-led Terra Firma, it is unlikely anyone expected the process to be quite so hard. However, in spite of the difficulties that confronted the London-based firm, Terra Firma still managed to close on a robust EURO2 billion, a number that despite falling a billion euros below the initial target, still represents a good take in what has been a tight environment.
“I don’t know that the fund-raising market could be anymore difficult,” Terra Firma’s Director of Investor Relations, Bill Miles, said. “The process was long and arduous, and the limited partners today have become very skeptical.”
Investors in the fund, Terra Firma Capital Partners II, include Adams Street Partners, NIB Capital, Wilshire Associates, Horsley Bridge, the state of North Carolina, Dupont, GE Structured Finance, the Canada Pension Plan Investment Board and Nomura, which is the largest investor, contributing 10% of the total commitments. Merrill Lynch and Citigroup were hired as placement agents for the effort.
Terra Firma expects to deploy the capital in roughly three years, with two to three transactions annually. The firm will target businesses with enterprise values at around EURO1 billion and will seek out “low growth” companies in “out of favor” sectors. Terra Firma’s lone investment as a standalone shop is its July 2003 acquisition of Waste Recycling Group for GBP530.9 million.
Terra Firma, with offices in London and Frankfurt, was spun out of Nomura’s Principal Finance Group in 2002. The firm, with a clean track record and history of solid returns, was able to find success early on in the fund raising process, and corralled a total of EURO1.1 billion for its first close in November of that year. However, after that, finding money became increasingly more difficult for the firm.
“The target for the fund was established prior to September 11th, ,” Miles said. “Since that time, the equity markets -both public and private-changed fundamentally, and the shift away from equity risk in the global capital markets was the primary reason for the adjustment [in the fund’s size].”
Also at play, the competition in the market during Terra Firma’s two-year-plus fund-raising window also made things difficult, especially considering that for many institutional investors, there has been less money to go around than in years prior.
In the past three years, the European market has been flooded with mega funds, including EURO4 billion-plus offerings from CVC Capital Partners, Cinven and Permira, each being raised in successive years starting in 2001. Additionally, Candover, Bridgepoint and Charterhouse Capital have all closed on funds larger than EURO2 billion during the same time period, and 3i Group and Doughty Hanson, not to be outdone, are also in the midst of trying to raise their own EURO3 billion funds.
In addition to the outside market factors, Terra Firma also had to contend with internal hurdles as well. Particularly troubling to the firm were some notable defections, including the departures of Jennifer Dunstan, Matthias Moser, Mark Tagliaferri and Peter Middleton.
“There wasn’t much time between when we decided to spinout from Nomura and when the spinout actually occurred,” Miles said. “While most private equity firms have a lengthy amount of time to prepare for a fund raising and settle any thorny issues with regard to employees, Terra Firma did not have that luxury.”
To make up for the losses, though, Terra Firma was able to bring in some new blood, and hired Joe Sinyor, the former head at the Trinity Mirror, and Stephen Alexander, former CEO of Hillsdown Holdings, as managing directors.
And while Terra Firma may have fallen short of its lofty target, the firm is certainly not the first to have missed during this era of fund raising. Going forward, the firm is now just happy to return its focus back on simply finding new deals.