Fundraises to flotations: a promising year for the UK

Alice Murray
04 February 2014

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The UK market witnessed swathes of fund closes and a surprising number of IPOs last year. But will this positive trend continue in 2014? Alice Murray reports

A quick glance over the highlights of 2013 reveals myriad impressive fundraises. Indeed, there were a whopping 37 funds closed in the UK (including credit vehicles) according to unquote" data. Closes were reached by lower-mid-market players such as Synova Capital, Palatine Private Equity and August Equity, through to Graphite Capital and Equistone Partners Europe in the mid-market and Vitruvian Partners, Cinven and Permira's first close at the upper end of the spectrum.

According to Paul Newsome, head of investment selection and monitoring for private equity at Unigestion: "2013 was a bumper year for fundraising, although the higher volume could have been the result of funds catching up after holding back from raising prior to 2012. This year is expected to be another strong year for fundraising. However, with so many of the top teams raising in 2013, it may be that funds out on the road this year take slightly longer to reach a close."

Antoine Dréan, founder of Palico and Triago, notes a major theme of 2013 was the amount of cash returned to LPs, estimated to be around $120bn globally. "This should boost fundraising this year. However, with such a wave of cash being returned it will be tough for LPs to allocate capital without lowering the quality of the managers they invest in."

Dréan points out that a number of large pension funds have been struggling to hit their target allocations. Newsome caveats this by highlighting how LPs often take on a crowd mentality when investing; piling into funds after a first close. This is likely to result in the continued bifurcation of the market, as seen in recent years, with a handful of funds raising large amounts in short spaces of time while others struggle to gain much-needed momentum.

Hitting the road
Funds to watch out for over the next 12 months include ECI Partners' 10th vehicle, which is reportedly targeting £500m – just slightly more than its current fund, which closed on £430m in December 2008.

Oakley Capital appears to be just weeks away from closing its latest vehicle. In November 2013, its filing with the SEC revealed that it has raised more than €310m.

Following Silverfleet Capital's appointment of Annette Wilson as head of investor relations (the first time the buyout house has had an individual dedicated to the role) it is likely the firm will be hitting the road shortly, especially as its current fund carries a 2007 vintage.

Doughty Hanson is understood to have formally launched its sixth fund in the final quarter of 2013, and will be targeting €2bn. Its fifth fund, which closed in 2007, is now fully invested.

Lingering listings
Another encouraging theme in 2013 was the success of private equity-backed IPOs. Following years of fractious relationships between the asset class and institutional investors, it seems the past has been forgotten and private equity-backed listings are attracting strong levels of investor appetite.

Throughout 2013 there was a steady flow of IPOs, with notable listings including Countrywide, Esure, Partnership Assurance, Bargain Booze and Foxtons. But the real action came in the final quarter of the year when Oaktree Capital listed Stock Spirits, Blackstone and CVC listed Merlin Entertainments, Permira listed Just Retirement, Terra Firma listed Infinis, Sun European listed Bonmarche, VC-backed Oxford Immunotec listed on Nasdaq and VC-backed Applied Graphene Materials listed on AIM.

Newsome expects to see a continuation of IPOs this year as buyout houses rush to take advantage of the rising capital markets. The first few weeks of 2014 have already seen HgCapital preparing Manx Telecom for an IPO and there are reports that OpCapita-backed Game Group is planning a future listing.

Newsome also predicts an uptick in trade exits: "Corporates have been sitting on cash for some time now and should be feeling more acquisitive."

Joining forces
Another boost to the exit market could come through LPs' increased demand for co-investments. One of the most notable deals last year was Doughty's sale of Vue to two Canadian pension funds – Omers Private Equity and Alberta Investment Management Corporation – for a cool £935m. The deal saw Doughty doubling its money, which will come in handy for its current road trip. "GPs accept that offering co-investments is a way of life now due to their obvious attractions for LPs. However, only a minority of LPs have the mandate and the requisite skills to execute co-investments, but this number should grow further this year," says Newsome.

The last 12 months have been surprisingly good to the asset class, and the next 12 are expected to be even better. It will still be a tough ride for many firms out on the road, but this should ensure that LPs and GPs are well aligned, and investment strategies are well thought through and robust. The only question mark will be over dealflow - will buyout firms be able to secure the best deals at the best prices?