Milestone launches annual investment club

UK mid-market buy-and-build specialist Milestone Capital Partners has fundamentally shifted the focus of its fundraising strategy, leaving behind the traditional 10-year limited partnership vehicle in favour of an annualised vintage 'investment club', unquote" can reveal. The firm is currently in the process of gathering commitments from investors, with the formal closure of the 2008 offering expected in the summer and has already completed two deals from the new set-up - Cadum in France and Coffee Nation in the UK (21 April 2008, page 40-41).

The foundations for the move were laid in November 2006, when Milestone purchased the assets of Anglo-French private equity house European Acquisition Capital (EAC). Since this point the company has extensively restructured EAC's portfolio and is now re-launching the business under the Milestone banner. "We made about five exits realising approximately EUR330m in value and we are now looking to re-build investor confidence," explains managing partner Erick Rinner. In order to achieve this, the firm is asking potential investors to commit up to EUR100m per year for anything up to five years, rather than asking for large lump sums which will be locked up for a decade.

This, it is argued, allows for a greater flexibility when investing in comparison with traditional structures, the nature of which often put pressure on firms to invest irrespective of market conditions. This is something that is particularly salient in the current climate, with the prevailing illiquidity in the debt markets making it difficult for many GPs to deploy the large pools of capital at their disposal: "This structure is very flexible, if we can't find the right deal then we simply won't invest" asserts Rinner.

Much of this pressure comes from LPs, who express distaste at the idea of fund managers sitting on their hands during slow investment periods, while collecting substantial management fees. To negate this, investors in Milestone's club will only pay fees on drawn capital. Furthermore, both the management fees and carried interest rates are significantly more favourable to investors, an initiative that Rinner suggests more will have to adopt if they are to maintain investor loyalty. "LPs are not happy at the moment; go to any conference and they are all saying fees are too high. Any fund that takes into account their interests in a different way will do well," he says.

The flexibility of the new structure is also designed to attract investors who are seeking opportunities for direct co-investment alongside their funds, as Gilbert de la Ferriere, managing director of fund placement at Calyon, explains. "There are fewer investors in and they are much more involved than in a traditional fund structure, it wouldn't appeal to LPs who are not interested in co-investments." Indeed de la Ferriere suggests that it is this feature that marks Milestone's strategy as different from previous annualised funds, such as those operated by LGV Capital and Alchemy Partners. "Some structures in the past have been similar, but they were more like annualised variations on the traditional fund set-up and were not so tailored for co-investments - to our knowledge no one has done anything like this before."

Whether or not this marks the beginning of a greater diversity of approach to private equity fundraising is to be seen, although Rinner suggests that it is an idea that has longevity. "It is a good alternative model for LPs who want to invest in the lower mid-market, but either don't have much experience or want more diversity, especially as they can get better direct access to the deals."

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