GP Profile: Palamon Capital Partners

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"We are pan-European but are not in the local dealflow whereby companies are passed from one PE house to another," says Palamon partner Daan Knottenbelt. Indeed, only one of the 38 deals completed by the firm was acquired from a private equity house, though 40% of exits are to another sponsor. "We bring an international aspect to the local market," says Knottenbelt.    

Palamon invests growth capital of between €15-80m in lower-mid-market companies from its office in London. The 38 deals it has completed over the years were across 10 countries, attesting to the fact that the GP is fluid in its approach to regions. By its own admission, it is a thematic growth capital investor that focuses on entrepreneurial founder-led businesses. Almost four funds on, this approach has not changed.

The GP is currently raising its fourth vehicle. Palamon IV is thought to have reached almost 95% of its €400m target and is roughly 50% deployed. The GP's previous fund – Palamon Auxiliary Partnership – closed on its target of €210m in 2013 and its investments and commitments were partially rolled into Palamon IV.

"The auxiliary fund was always a two-year vehicle with a view that it would eventually be tagged onto a longer-dated, more traditional fund," says founding partner Louis Elson.  

Even if we do take part in a process – it is rarely an auction – we have strong conviction about the companies we want to buy" – Daan Knottenbelt, Palamon Capital Partners

The current LP base includes Adams Street Partners, PGGM, Goldman Sachs, Morgan Stanley, Honeywell Corporate Pension and Rothschild.

Previous funds include Palamon I, which closed on €440m and realised a return of 2.3x with a 15% IRR; and Palamon II, which closed on €670m and realised a return of 2.4x, with an 18% IRR.

In 2015, the GP attracted much attention from the market when it mandated Credit Suisse to run an auction of stakes in Palamon I and II, which were purchased by a consortium of LPs at 95% and 97% pricing, respectively. This included new LPs – Goldman Sachs, the Netherlands' second-largest pension fund PGGM and Rothschild Merchant Banking Group – and returning LPs including Adams Street Partners and Morgan Stanley's private equity arms.

Broadly speaking, the private equity house focuses on five sectors: business services, with examples including Loyalty Partner and Retail Decisions; financial services including SAV Credit (now NewDay), Nordax and Towry; software services such as TeamSystem; consumer, including Espresso House and FeelUnique; and healthcare, with investments including Prospitalia and SarQuavitae.

"We do our own market research and draw out themes that we then take to the market. Even if we do take part in a process – it is rarely an auction – we have strong conviction about the companies we want to buy," says Knottenbelt, adding that it was this very conviction that helped the GP see off stiff competition to acquire UK headquartered FX brokerage platform Currencies Direct in 2015.

Investment and exit buzz
Since 2014 Palamon IV has made five fund investments, with the most numerous in the consumer sector: in 2017, it acquired Swedish sock brand Happy Socks; in 2015, it bought FX brokerage platform Currencies Direct, luxury rug retailer The Rug Company and Italian leather accessories brand Il Bisonte; and in 2014, it acquired legal services provider Simplify. In addition, significant add-on acquisitions have been made by Towry (AshCourt Rowan), OberScharrer Group and Currencies Direct.

In terms of recent exits, Palamon sold Spanish elderly care provider SarQuavitae in February this year (agreement reached in October 2016) generating a 3x return; sold Swedish energy supplier Eneas to Norvester Equity in April 2016 for 3.3x return; and exited Towry last year, generating a 12.5x return.  

Our approach was innovative in the mid-market when we began – saying that we could reach all of Europe from one country – but now many mid-market firms have followed our approach, which means we have to work harder to make our differentiation understood by the market" – Louis Elson, Palamon Capital Partners

"Towry is a deal that typifies Palamon as it exemplifies our thesis-based investment. We were proactive in closing in on the deal, had a clear change process in place, thought about the industry in the UK and wanted in on it," says Knottenbelt, adding that after completing 16 acquisitions, Towry's AUM grew to £9bn from £250m and turnover to £130m from £5m.

Palamon was set up in 1999 by ex-Warburg Pincus partners Louis Elson and Michael Hoffman, and there have been many developments to the private equity landscape that have affected the sponsor, though not necessarily changed it.

"Since setting up, the two biggest differences are the redefinition of the mid market as well as the institutionalisation of our industry, which is accelerating as we speak," says Elson. "Our approach was innovative in the mid-market when we began – saying that we could reach all of Europe from one country – but now many mid-market firms have followed our approach, which means we have to work harder to make our differentiation understood by the market." 

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