Permira: neither brilliant nor a leader

By Jon Moulton (a self-described "tiny, current shareholder in SVG and a long time ago part of the strategy discussion leading to SVG's birth")

I found the positive tone of the story which bore the headline "Permira leads the way - again" remarkable. No-one wants this "again"!

An alternative, more appropriate, headline would have the flavour of "Success at Dunkirk, Some Troops Recovered. Some with Rifles".

SVG was a "monoline investor" - part owned by Permira and largely investing in them. Permira has a director at SVG. SVG followed a strategy of investing ever larger amounts into one investment manager with a very severe dependency on continuing debt markets and prosperity needed to keep success rolling. The possible benefits of diversification were largely ignored - as were the risks as yesteryear's success was expected to roll on forever.

In its last accounts (March this year) SVG's chief executive stated that "the Company is well positioned to meet its uncalled commitments of £1.6 billion". Oops.

A huge commitment to Permira funds relied on either distributions from Permira or loans drawn against the value of Permira's funds to cover the calls for that commitment. In the event, in common with many megafunds, the latest Permira fund is having severe problems and these sources of funds dried up. So SVG could not fund all its potential calls from Permira.

SVG thus faced the possibility of not being able to fund its obligations as they fell due. A phrase not unassociated with insolvency.

So SVG had to reduce its liabilities and/or raise money. Acting correctly it has done both but at a very high cost to its investors who will pay the fees on their full commitment to Permira but will only invest half of that commitment - much of it already invested in manifestly troubled positions - and then lose a quarter of the distributions from this expensive investment.

The solution put other investors (probably - the legals are not public) in the same position as if SVG had defaulted. Permira presumably forgave SVG its commitment in exchange for the continuing full management fee else Permira could have probably sued SVG for a commitment it could not fund.

Overcommitment proved rash and extremely expensive to SVG shareholders - the share price is below one eighth of what it was.

Permira now collect a higher percentage management fee to invest less into its fund. This fund has had a weak start and with a consequently lower chance of a carried interest. A smaller fund will enable Permira to launch a new fund with better carry prospects sooner - subject to investor demand!

I'm sorry - this is not a brilliant move. SVG and its shareholders have suffered the effects of the obvious risk they took and avoided a possible bankruptcy. Permira lose investable capital.

This does not have the attributes of a success - and I do not think this is leadership. It's lifeboat work.

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