What's next for Terra Firma?

Alice Murray
12 February 2015

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Terra Firma has announced it will be investing from a €1bn pool of committed capital reserves. Alice Murray speaks to Guy Hands to find out what the new strategy really means

According to Guy Hands, the firm's chief investment officer and chairman, the cash is largely Terra Firma's own capital reserves, combined with some third-party capital.

The firm will explore three strategies in order to deploy the €1bn pool – it can be used to launch a new fund, to underwrite deals or to co-invest in deals managed by the GP.

On launching a new fund, Hands explains: "If we decided to launch a new fund, we could use our own cash, alongside one or a few other investors, and hold a first close for several hundred million in order to get the fund started quickly." Hands also points to fundamental issues with the traditional fundraising market. These include the fact that, while a GP might have found a good strategy, the market may have moved by the time the firm is out on the road.

He is referring to Terra Firma's energy fund, which was launched in 2012. Expected returns for large renewable deals were around 15% at the time but, by the time the fund gained any significant traction, returns were pegged at around 10%. Today they sit in the 6–8% region.

According to Hands, Terra Firma is now exploring a number of smaller, specialised funds. Hands notes the changing attitude of LPs towards funds and, in particular, GP commitments: "Endowments and sovereign wealth funds want something different, something special, and personal contributions from the GP's decision-makers." He believes the only way to achieve true alignment is having skin in the game.

While this concept is arguably what the asset class was built on, Terra Firma's new strategy could see the GP committing around 30% of its own cash for future funds and deals, whereas the industry standard has dropped to a worrying 1–2%.

On exploring a deal-by-deal strategy, Hands says he has spoken to a sovereign wealth fund about future collaborations. He says one investor he is in discussions with has suggested the GP contributes a third of the deal value and, in return, will be rewarded with 50% carry after a preferred return to the investor. "If we find a deal where that makes sense, we will return to that sovereign wealth fund. They will be the first we approach, as they want access to the best deals and are willing to pay for it," Hands adds.