DealZone

Private equity asks for a top-up

August 20, 2009

cashA number of private equity firms in Europe are going back to investors for more money to fix over-extended balance sheets and fund add-on acquisitions for companies in their portfolio.

Private equity’s world has turned upside down since the start of the credit crisis. All the stats show that deal flow has dropped off a cliff and those deals that have got done are smaller and the equity cheques larger. At the same time,  restructuring situations are mounting as firms face the uneviable choice of injecting more equity or face losing their investments to the banks.

The upshot is that buyout funds raised in rosier times are no longer suited to the current environment, if indeed they have any capital left at all.

As I have discovered, Nordic Capital, Investindustrial – the Bonomi family’s southern European buyout firm – and Graphite Capital are all asking investors for more money as they look to adapt to the new climate.

Many investors are currently over-committed to the asset class, meaning that the reaction to requests for new capital is likely to be mixed.

One investor in KKR’s second European buyout fund refused to back a planned 750 million euro annex fund because he viewed it as “a good money after bad” situation.

Other top-up fund stories have a more positive spin.

Inflexion raised a 75 million pound top-up fund earlier this year for its 2006 fund to help it take advantage of what it saw as increased opportunities stemming from the financial crisis. Similarly, Graphite is asking for a modest 35 million pounds to enable it to do larger deals without over-commiting its existing buyout fund, which is so far only around 25 percent spent.

Investindustrial, meanwhile, has spent its 2005 buyout fund but wants more money to fund bolt-on deals for the strongest companies in the portfolio. Nordic Capital wants 150 million euros for some defensive portfolio work and some add-on deals but is asking to reuse money otherwise destined to be returned to investors.

Whatever the purpose of top-up fund, had buyout firms (in most cases) retained enough capital in their funds in the first place, they would not be knocking on doors now.

Investors expect to see more such top-up requests, and say they will consider all such requests on their individual merits. But they also hope firms will learn from the experience and make adequate provision in the future..

Read the Dealtalk, or go to the Graphite story.

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