Palamon reaches €210m close

Alice Murray
30 September 2013

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After nearly two years on the road, Palamon Capital Partners has closed its latest fund on €210m, a significantly smaller amount than its €670m predecessor. The reduced fund size highlights continued difficulties in the fundraising market and GPs' willingness to adapt to the changing environment.

Palamon launched its Palamon Auxiliary Partnership 2013 fund in late 2011. However, during the protracted process the firm decided to reduce the size of the fund and offer investors an innovative co-investment option through the creation of a separate Auxiliary Fund.

"After recognising that we would have to accept a reduced fund size we went back to our core investor base to discuss what would happen if we created a smaller, differently structured fund," explains Louis Elson, managing partner of Palamon.

According to Elson, Palamon has historically been investing at a pace of around €100m per year. "We wanted to maintain that pace because our infrastructure and market position allow us to do that. Furthermore, the types of deals we target require that pace."

After discussing options with its investor base, Palamon decided to instead set up a two-year fund. Says Elson: "This way we have the exact same firepower as before, we're able to remain solidly in our space and we don't have to change our own internal drivers."

The scaled-down fund size, reduced investment period and increased investor flexibility around co-investment signal continued difficulties in the fundraising market. However, they also show a GP reacting to the tough conditions by adapting its product to meet LP demands while maintaining its traditional, tried-and-tested investment strategy.

But by going against tradition, Palamon's new fund structure unsurprisingly throws up a handful of new issues to tackle. First is one of concentration: with a reduced fund size that still targets the same deal range, the fund will be more concentrated per deal. "Our investors were confident about backing this," says Elson. "Whereas many groups are lowering their concentration, ours has been raised."

The other issue raised through the reduced investment period is whether or not the team will have the energy to hit the fundraising trail again in just two years. "I think in two years' time the market for European growth equity is going to be significantly better than it is today," says Elson.

Palamon raised its latest fund without a placement agent.

Investors
The co-investment fund received commitments from a range of more than 20 investors including fund-of-funds Adams Street Partners, the corporate pension plan of Honeywell, AlpInvest Partners and Quilvest.

Investments
Palamon will continue to employ its investment strategy of investing €100m for new deals. Its Auxiliary Fund will target controlling stakes, writing equity cheques of between €15-80m in mid-market growth services businesses in Europe.

On average, Palamon has increased portfolio company revenues by 20% per annum since inception. The firm scored an impressive exit in September last year with the sale of Swedish coffee chain Espresso House to Herkules Capital, which generated a 3.4x return on the original 2006 investment.

People
Louis Elson is managing partner of Palamon.