Follow the leader - again

Kimberly Romaine

Permira has again made headlines by being the first jumbo fund in a decade to offer limited partners a fair way out. By relinquishing a quarter of all profits of Permira IV, which is 52% drawn down, limited partners may reduce their commitments by up to 40%. It is the second time in as many years the buyout giant made history - two years ago it raised more than EUR11bn to become the largest fund for European buyouts.

The way Permira established itself as a trailblazer is the same reason it will remain one and persevere - it treats its investors with respect. The blue-chip roster of LPs in Permira include Washington State, Calpers, Calstrs, AlpInvest, and SVG, it's largest investor and one whose cash constraints were most publicised.

Permira had a respectable IR track record even when the market was strongly in favour of GPs, with one source revealing that raising the heavily oversubscribed fund in 2006 was the 'easy bit'; the real challenge was assuaging LPs following the final close, when commitment requests were scaled down and balanced against others'. As some other buyout houses took advantage of conditions that put them on top of the totem pole, raising fees and imposing other ill-willed measures on their investors, Permira managed to avoid an investor backlash.

It did this as it shot to public infamy around the AA deal in the UK; the apt handling of rioting picketers and furore around the Treasury Select Committee back then may have given Permira the foresight and experience needed to avoid an investor relations disaster now. Not all GPs are as well equipped, though they may look to follow in Permira's footsteps - again, as many were so inspired two years ago.

Permira's move is genius, since the solution benefits itself as well as all its investors:

- LPs with cashflow problems are given an alternative far less punitive than other options (a secondary sale in an unforgiving market that would have crystallised a sizeable loss (positions are trading as low as 10% of their net asset value); or an outright default, which incurs draconian penalties, such as writing off all other drawn-down capital).

- Thus Permira comes off as sympathetic to LPs in need, brownie points that should come in handy when, not if, LPs again rule the roost. In being flexible with its investor base, the GP indirectly benefits itself through relationship maintenance. It also means Permira continues to earn fees, the freezing of which had been one option; and that the GP can still invest; ceasing capital calls would have meant a suspension in deal doing, while in fact Permira recently backed Italy's Mazzini.

- The move also benefits robust LPs, whose feathers could have been ruffled if any plans were seen to be too lax on investors unable to 'keep up'. However, rather than just letting struggling LPs off lightly, the measures are sufficiently punitive to make them attractive only to those truly in need, while actually benefiting those that are still able to meet capital calls. This is because LPs scaling back are forfeiting a quarter of all eventual profits on Permira IV in favour of those LPs maintaining their position. So the measures are not just punitive, they also offer reward to those that deliver.

By being the first to announce such a measure, Permira will be remembered as a trailblazer for what would become more common practice, and heralded as a brave innovator. Now the onus is on other large funds to follow, and probably to keep upping the ante, as limited partners will have come to expect flexible treatment at least as good as what Permira put on the table.

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• France