Silverfern holds first close for SGO Fund III

"We will have complementing existing mandates and co-investment pockets, so the overall commitments targeted will be around €500m, but the target size of the fund is €300m," Robert Spittler, managing director at Silverfern, told Unquote.

The vehicle is domiciled in Luxembourg. The GP did not work with a placement agent, but Loyens & Loeff and Kirkland & Ellis provided legal advice.

Spittler told Unquote: "We used to fundraise for each transaction, but over the years the committed capital in mandates and managed accounts grew. We chose to create a fund a year or so ago; we reached out to our existing investor base and new investors, and took feedback on how to structure things. It took 6-12 months from the beginning to now, at different intensities. We also did two transactions at the end of last year and the beginning of this one with investors who wanted to see some dealflow prior to committing."

Asked about the final close, Spittler said: "We expect to hold a final close in 2020, but the current environment has obviously changed some of the expected timings. If the lockdown goes on until July, it may take longer, but if we open up in April or May we will aim to close in late summer or autumn."

Managing director Alexander Zucker added that although the coronavirus pandemic did not have a significant effect on the fundraise, there may have been more LPs on board for the first close during normal times. "We were fortunate enough to have commitments lined up prior to the travel restrictions, so we were not impacted. It's probably fair to say that under normal circumstances we could have had some more investors in the process at the first close – some could not make the timeline."

Investors
Zucker explained that the LP base will be similar to Silverfern's previous investor base, in which a group of family offices backed the firm on a deal-by-deal basis: "Historically we have invested on behalf of large family offices and institutions such as private banks, but now there is a growing number of institutional investors complementing our LP base. We have existing and new investors for the first close and we have both institutional and private investors."

The fund has an unnamed institutional investor as its cornerstone LP. The minimum commitment size for SGO III was €5m.

Zucker added that the fund is backed by LPs from a broad range of geographies. "The biggest part of the LP base is European in terms of numbers, then we have some from Australia and New Zealand, as well as Asian investors. But there are also family offices from the Middle East, Latin America and North America."

Investments
The fund will deploy equity tickets of €20-100m, with an average of €30m – although the average ticket will ultimately depend on the final close, Zucker said. "But there are concentration limits, meaning that we will make 8-12 investments. Our anchor investors are interested in co-investments, showing a significant amount of appetite for this."

Spittler explained the fund's geographic focus: "The fund is global in the sense of our office locations, with Amsterdam and Frankfurt for Europe, New York for North America and Sydney for Australasia. We have done investments in India, for example, such as an IT outsourcing company, with its customer base in the US economy. So the main markets will be North America and Europe, as well as Australasia."

The GP will be flexible in its investment strategy and will seek businesses that are profitable, but with significant potential for future growth. "The investments will be opportunistic in the sense that we are not really constrained to industries and regions," said Spittler. "The opportunity is in overlooked businesses, meaning businesses that are not in the focus of our competitors. Our objective is to make conservative investments in the private equity environment with low leverage and robust business models." He added that the type of investment is also flexible, but with one area ruled out: "We are not constrained to certain types of transactions and can engage in growth investments, traditional LBOs and so on. But we would not do restructuring investments."

Spittler said that the current market is rich in opportunities that fit the GP's investment profile. "We focus on areas where value is misperceived, going into situations where it might be hard to see the value. The Covid-19 situation will create a lot of these opportunities arising from timing pressure or difficulty in analysing the numbers, leading to investments that are not just a plain-vanilla exercise. We will see a lot of opportunities for complexity, where you need experience. We have done this for many years and have seen economic downturns before, and we strongly believe that there will be a lot of opportunity ahead."

The GP therefore expects to increase its investment pace with the new vehicle, Spittler told Unquote: "Our historic pace of investment was four per year, and last year we did two. This year we expect to go back up again – we are currently working on a number of opportunities for every team in every office location."

Zucker expects that the firm's historical approach to financing and leverage means that its strategy will be resilient to the coronavirus crisis. "It would be hard to get a debt package at the same level as one might have done in Q4 2019 now. But our historical entry leverage was often around 3-4x EBITDA, which is relatively low. With the market coming towards the levels that we are already used to working with, we will have to work very hard to gain trust and be able to acquire companies at a fair valuation with low leverage. But this is in our favour."

People
Silverfern – Robert Spittler, Alexander Zucker (managing directors).

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