DACH GPs consider alternative funding models

Fundraising in the DACH region reached a post-crisis record in 2017, raising €6.2bn across nine different vehicles. However, as the market matures, some GPs are looking at alternatives to the standard LP fund model.

There are some clear advantages to raising a traditional private equity fund: equity capital is readily available for fast deployment and GPs are clearly incentivised to be focused on the eventual exit and therefore the LPs' returns.

However, in the last year there have been some high-profile examples of GPs having success with other models. Three of the top five most active buyout investors based in the DACH region last year used non-standard models. Aurelius Equity Opportunities uses a listed industrial holding structure, while Hannover Finanz uses a range of evergreen vehicles and Perusa recently revised plans for a new buyout fund in favour of a more bespoke vehicle.

Brockhaus Private Equity took a similar approach to Aurelius last year and launched a listed investment vehicle. Marco Brockhaus explains: "The vehicle is an AG (German stock corporation) that is to acquire and hold the companies. The technology holding will have consolidated financials starting with the first deal. To date, we have raised approximately €50m. The number of investments will depend on their size."

Not having a fund simplifies overheads and gives us a bit more flexibility with respect to holding periods" – Gregor Hilverkus, Legian Investments

One reason for seeking a different structure is for the longer investment horizon that it enables, Brockhaus says: "A lot of our past investments continued to show impressive growth trajectories after our exit; with a longer term exit horizon the full value of investments could be realised."

This is also attractive to potential portfolio companies, says Brockhaus: "Additionally, in discussions with entrepreneurs who are seeking a perfect home for their companies, we observe a substantial USP of our new long-term approach with a lot of entrepreneurs preferring to sell their businesses into a structure like ours."

Former CVC managing director Gregor Hilverkus has recently founded a Swiss PE firm, Legian Investments, focusing on the DACH region. He recognises the flexibility afforded by not having a standard fund. "When we set up our business we wanted to focus our time on doing deals and developing companies," he says. "Not having a fund simplifies overheads and gives us a bit more flexibility with respect to holding periods."

Alignment
Hilverkus sees three main options for firms like Legian: "We can continue on a deal-by-deal basis, raise a traditional fund or raise a vehicle that is a bit more bespoke, where you put three or four deals into it." This excludes the evergreen fund option that he looks on slightly less favourably. "Many people dream of having an evergreen vehicle but if I put myself in an LP's shoes I think it is better to have the exit focus that comes from one of the other structures," he says.

However, the other models have been more warmly received by LPs in certain circumstances. Says Hilverkus: "Some capital providers do not like blind pools. They would rather have a direct stake in a company where they know the management and the business than a fund commitment that seems a bit more abstract." In these cases a deal-by-deal arrangement works best and also helps LPs to reduce management fees. "There is also the advantage of not charging any fees on non-invested capital in a deal-by-deal structure," he says. "We charge a moderate ongoing fee to cover expenses and we are aligned on realisation. We also invest a meaningful amount of our own money."

A listed vehicle often leads to a more diversified LP-base. "Our investor base spans a variety of backgrounds," says Brockhaus. "However, due to a quick fundraising during the private placement last year, it was principal investors that subscribed rather than asset managers. At public markets where investors are used to short timeframes, we expect that to change."

In general, Legian's Hilverkus sees this development as part of a more general post-crisis expansion of the capital base in private markets, linking it to specialisation in other parts of the market: "More funding models is a part of this general trend and I think it is here to stay."

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