Three Hills holds EUR 1bn final close for THCS IV

Three Hills Capital Solutions IV had a EUR 900m hard-cap, which was raised to EUR 1bn in agreement with the fund’s LPAC, managing director of investor relations Stephanie Mata told Unquote. The fundraising process was formally launched in Q3 2021, with LP diligence processes beginning in Q4. The vehicle held a first close above target in Q1 2022, she said.

Rede Partners acted as placement agent on the fundraise, while Clifford Chance provided legal advice.

The GP held a final close for its predecessor fund in 2019 on EUR 540m. The firm took two considerations into account when deciding to raise a bigger fund for its latest vintage, according to partner Marco Anatriello.

“A lot of the capital we provide to entrepreneurs is deployed into growth plans, M&A opportunities, internationalisation, add-ons, and buy-and-build,” he said. “In some instances in the past, our companies wanted to do more with us, but we were maxed out in terms of diversification or the maximum ticket. A larger fund will not change the type of company, but we can back them for longer and with a more ambitious plan.”

Facilitating greater geographic diversification within the fund was also a motivation for raising a larger fund, according to Anatriello. “We have strong UK and Italian DNA, but we have added the Benelux, Spain and France over time; we’re also looking at the Nordics, and we have done our first deal in the US,” he said. “The firm has evolved in terms of the number of people to cover and deliver deals in those markets.”

Following the final close, the GP announced its investment in France-headquartered Castellet Hospitality, a budget and midscale hotel group.

Investors
The majority of THCP’s LPs re-upped for its latest vehicle, according to a press release. The fund has sealed commitments from public pension plans, foundations, insurance companies, consultants and sovereign wealth funds.

THCS IV’s LP base differs from that of predecessor when it comes up to the amount of capital provided by different forms of LPs, Mata said. “We’ve always had strong private wealth backing, which is a key part of our strategy and network, but we’ve seen an evolution towards institutional investors,” she said, adding that the fund has a 70:30 ratio of institutions to private wealth in this fund, whereas the firm had a 50:50 split in the previous fund. “We intend to retain this 30% portion for private wealth going forward,” she said.

The GP has also added new institutional investors for its latest fund. “On the institutional side, we have added additional LPs including a new US endowment and a new Canadian pension fund, and a large Asian sovereign wealth fund,” Mata said. “We also have new European insurance companies, pension plans and asset managers.”

The current macroeconomic situation highlighted the strength of THCP’s strategy for some LPs, according to Mata. “When we kicked off the fundraise at the end of last year, we had not really seen the full impact of the current market in the alternative assets space: growth equity returns were still very high, for example,” she said. “When markets became more challenging, we saw a larger wave of LP demand for our fund, as our strategy gets better equity-like returns on a risk-adjusted basis.”

Investments
THCS IV will continue the GP’s strategy of providing preferred capital, via instruments including senior, preferred and convertible debt, as well as bonds and loans. It also takes equity stakes, often in the form of warrants or a kicker, Anatriello said. THCP takes minority positions in businesses but also takes board seats, he said.
The vehicle will generally deploy EUR 40m-EUR 80m tickets but can invest more with LP co-investments. The fund can invest up to 20% of its capital outside Europe, including in the US.

The fund will have a four-year investment period and will back 12-14 companies, whereas its predecessor had an investment period of three years and will back 10.

“We believe that the current macro environment suits our product – this market should actually suit our strategy and style more than a more bullish market,” Anatriello said. “We are in an environment where the interest rate is going up, traditional debt financing is more expensive, and the valuations we saw in the past few years are probably not achievable anymore. Entrepreneurs might not want to sell straight equity in a situation where they can’t maximise value, but we can provide more flexibility on financing, time horizons and governance.”

An example of such a situation could be a company that had previously wanted to go public to raise capital for an M&A strategy. Such a business might now prefer a preferred capital deal, Anatriello said, adding that companies including Airbnb and Expedia looked to similar forms of financing during the coronavirus pandemic to shore up their balance sheets.

People
Three Hills Capital Partners – Stephanie Mata (managing director of IR); Marco Anatriello (partner).

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