£14bn raised: but how to spend it?

Hot on the heels of Cinven announcing a first close of €3bn, Apax has announced it has secured a first close on €4.3bn. Both announcements followed BC's final close on €6.5bn. Apax spent ten months on the road to secure the commitments and expects to close on €9bn (€9.5bn hard cap). BC spent 18 months in total, the last six of which were spent securing the final €500m to reach its hard-cap - fuelling speculation that fees may have been a driver.

But how will they spend this money? unquote" data suggests buyout levels stood at €71bn last year, putting it on a par with 2000 volume. To put the latest fundraising frenzy in perspective, in 1999 Apax raised €2.1bn, then the largest sum raised in Europe. Three years later, it closed its fifth European fund on €4bn. These sums - alongside others raised by European GPs - made headlines. These fund managers were deemed alchemists and returns from the early noughties made European buyouts a top-destination for global LPs - Apax's Fund V for example, investing in the dotcom aftermath, returned an impressive 2.3x money.

But then too many LPs piled into European buyouts, fund sizes swelled and it all came crashing down. This is evident by returns, which are woeful for that last generation of funds (not just mega buyouts). While they are said to outperform their mid-market counterparts over the long-term, their short-term performance is lacklustre.

Which begets the question of who should spend it, as well.

The rise - and some would say apparent fall - of Apax illustrates this. Apax's last €11.2bn fund has an annual net return of 4% according to recent LP data. While that is roughly ok for the vintage (data from private equity platform CEPRES suggests European buyouts vintage 2007 generate a mean return of 10% and 2% pooled), Apax's own figures actually reveal declining performance: when the GP launched the fund last summer, the figure stood at 11% gross.

Public news reports provide insight as to why. The fund, with 26 investments and capacity for a couple more (it is 85% invested) has already notched up two write-offs: Incisive Media and Panrico. Now at least two other deals are in trouble: Takko, a $1.7bn secondary buyout from Advent at the end of 2010, required an additional €50m in December, just a year after the deal was done, to prevent a covenant breach. Then in February Apax had to inject a similar amount into Marken.

"The firm claims it will be 2.5x, but 1.5x is more likely. This will put it in the top half, but nowhere near the top quartile," one LP in the fund says. While many GPs investing in the last five years have write-offs, it is feared certain will fare worse.

The big media splash earlier this week claimed that Apax's latest fund will be its first with a global focus; perhaps this could justify the big ticket. However, unquote" data reveals that Apax's last fund launch in 2007 stated a more global outlook would be sought. In fact one LP points to a number of deals done in the last year outside Europe, and expressed dismay at the GP's ‘fly-in, overpay and fly-out' attitude to Brazil.

The media reports also indicated Apax was virtuous on account of its sizeable €470m partner contribution. At roughly twice the normal percentage, it is indeed commendable - however sources indicate much of this was ringfenced from the sale of a stake in Apax a few years ago. So the move is clever, but does not warrant congratulations for the additional alignment. If you subtract that from the €4.3bn raised, as well as the €900m from shareholders (a number of SWFs own a tenth of the management company), the sum raised at first close is roughly what Cinven achieved.

One of the LPs unquote" spoke with for this piece is not re-upping in Apax (by choice; it is not constrained by any regulation). As one former SWF investor told unquote" last month: "Mega-funds will still raise capital since you do not get fired for putting money into big brands."

It is refreshing to see LPs signing LPAs again after a long hiatus; these fund announcements as well as sentiment at last week's EVCA Investors' Forum attest to this. It is now for the industry to channel this money effectively so as to resurrect Europe's image as a superior destination for institutional money.

Apax declined to comment.

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• Topics
• Fundraising
• Apax Partners
• BC Partners
• Cinven