The Great Debate UK
LONDON, April 21 (Reuters) – SVG Capital’s structure has worked so well that no other private equity (PE) fund has chosen to copy it.
The two companies are closely intertwined: SVG <SVI.L> invests the bulk of its funds with Permira and is the private equity firm’s biggest investor. Damon Buffini, Permira’s chairman, was until 21 April a director of SVG.
He left at the end of a strategic review by SVG, whose shares are languishing some 90 percent below their peak.
Other listed private equity houses are completely integrated, like Electra or Hg Capital, or are arranged as funds of funds, with access to a range of different managers.
In the good times, this cosy model seemed to suit both partners well enough.
Permira was guaranteed a stream of funds from SVG, which piggy-backed happily on the high returns the firm generated, busily selling shares to stock market investors who wanted a liquid way to access to private equity returns.
No one at SVG seems to have found it odd that a supplier would sit on the board of his biggest customer.
Even the big shareholders voted, Soviet-style, 100 percent in favour of the 2005 deal that gave Permira the board seat. (Permira also holds around 5 percent of SVG’s shares).
But the credit crunch has exposed the weakness of excessive inter-dependence. It has turned SVG and Permira from a pair of muscle men into a couple of drunks propping one another up.
As one after another of Permira’s investments hit the buffers, SVG’s net asset value declined by 64 percent last year, with write-downs across a range of Permira-related punts, including Gala Coral, ProSiebenSat.1 (PSMG_p.DE) and Freescale, the chipmaker.
Worse, SVG found that it had made commitments to Permira IV, the latest fund, which it could not keep. Over-commitment, like over-leverage, was common during the go-go years.
Commitments are drawn down over several years, which in the good times meant SVG only ever put up a proportion of the total it committed, because Permira would generally return cash on an interim basis. SVG did this to avoid “cash drag”, i.e., lower returns from having too much cash.
Unable to raise the funds to meet its promises, SVG was forced to negotiate to cap its commitments at 60 percent of the agreed level last year. Yet despite its cosy relationship with Buffini — one that SVG chairman Nick Ferguson says “remains close” — SVG was hit with penal terms: it has to continue to pay fees on the original commitment for the lifetime of the fund.
Moreover, it has to cede 25 percent of its total returns to fellow limited partners (as investors in PE are known). Far from the relationship with Permira being a boon, its exposure to the firm left SVG effectively hostage to Permira and the other investors when SVG ran out of cash.
SVG says it expects to continue to place 75 percent of its funds with Permira “in the short term”. However, it is bulking up SVG Advisers, its own fund management arm.
Permira can hardly be blamed for all this, and anyway has hardly emerged unscathed. One of its largest investors has very publicly withdrawn some at least of its support, leaving Buffini to find new investors at what can only be called a less than propitious moment.
The unhealthy relationship between SVG and Permira isn’t the first unhealthy relationship in the financial sector to be abruptly broken up by the credit crunch. It won’t be the last.