Permira leads the way - again

As this edition of unquote" went to press, Permira had just made headlines by being the first jumbo fund in a decade to offer limited partners a fair way out (as the ink dries on this cover, investors had yet to respond). By relinquishing a quarter of all profits of Permira IV, which is just over half 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.

Permira remains a trailblazer for the same reason it first established itself as one - 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 suggesting 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; the apt handling of which may have given it 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, just as many were inspired to do two years ago.

Permira's move is genius, since the solution benefits itself as well as all of 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.

- Permira, therefore, 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, as 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 trendsetter for what will surely 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 come to expect flexible treatment at least as good as what Permira has put on the table.

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