GP focus: Palamon Capital Partners

Recent fundraising successes have highlighted a shift towards far greater transparency from GPs over upcoming exits and deals as a way of luring LPs to new vehicles. For example, as August Equity nears a final close for its third fund, it provided investors with details of two upcoming deals to be announced in January, giving visibility on around 40% of how the fund would be deployed.

Louis Elson, co-founder and managing partner of Palamon Capital Partners, told potential investors back in 2012 that Cambridge Education carried an enterprise value of £60m: "It was still a nice multiple back then," he says. However, at a time when uncertainty ruled, gatekeepers applied a 30% haircut to that value. The company was sold this month with an enterprise value of £185m.

Prior to the outstanding Cambridge Education exit, the firm sold Swedish coffee chain Espresso House to Herkules Capital in September 2012, generating a 3.4x return in a deal thought to be worth €100m. Meanwhile, existing portfolio company Towry Group is being closely watched by a plethora of potential buyers following the completion of a £47.3m refinancing in September last year. Under Palamon's stewardship the asset management company's revenues have grown by more than 35% each year. But, as Elson asserts: "To be a successful growth investor in Europe you've got to go against convention. You also must be patient and disciplined."

Despite this flattering track record and visibility on the Cambridge Education exit, after two years on the road Palamon closed its fund on €210m, but also reduced the investment period to two years; however its predecessor closed on €670m.

Off-the-record conversations with LPs have revealed that one of the major concerns over Palamon's recent fundraise was its IRRs. However, as well as the Cambridge Education exit producing an outstanding multiple, its IRR was a more than comfortable 58%.

Furthermore, Palamon's second fund, which raised €670m in 2006, has so far generated cash proceeds of €660m, a 3.6x return and a happy IRR of 28%. The fund still has 11 companies remaining, and as Elson says: "Our hold periods are sufficient for growth investments. Ultimately we're shooting for high returns with good IRR. We do deliver but it does take time."

Indeed, when investing for significant growth, hold periods will naturally be longer and that will take its toll on net IRRs. But, in comparison with top quartile funds, Palamon's IRR performance is healthy. 

Crumbling currency
A key feature of Palamon's recent road trip was US investors' fears over the breakdown of the euro. "That's exactly what we were fighting," says Elson. In fact, the adamant belief that the Euro would not even exist by the time Palamon closed its fund caused the team to drop its original investor documentation entirely and instead use a presentation on the future of Europe, detailing why the euro would survive and emphasising the continent's underlying wealth and stability.

According to Elson, this presentation typically produced two responses; either their team of economists disagreed, or the investor committee disagreed.

Another concern to LPs while Palamon was out on the road was organisational issues. Investors are highly sensitive to team stability, and a number of departures will not have been helpful while fundraising. At the start of the year partner Holger Kleingarn left for HIG Capital Partners and principal Ennio Valerio Boccardi also stepped down. 

Then, as a consequence of the reduced fund size, Palamon needed to right-size itself. The firm's head of IR, Annette Wilson, stepped down in October this year. Other recent departures include Jonathan Heathcote, who recently joined Stirling Square; and Owen Wilson, who joined Electra Partners as investment director in September.

Elson explains that analysts struggled to understand how Palamon's structure works, as it operates on a flat basis, with no "stars" or key members relied on solely for bringing in or closing deals. "We have a team of very bright individuals who have been very carefully selected from outside of the industry. They are brought into the Palamon system and taught the business. This is a team business, each deal has many fingerprints on it. Because of the way we are owned and compensated, everyone needs to participate," says Elson.

Commenting on the recent departures, Elson has a somewhat enlightened and sagacious stance: "We expect people to leave – that can be a natural consequence of teaching and mentoring them. I'm really proud of the people that have learned the industry through us and have gone on to do really interesting and innovative things."

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• Topics
• Fundraising
• Buyout
• Exits
• Palamon Capital Partners
• August Equity LLP
• Herkules Capital
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