The phrase ‘captive team’ evokes images of suited inmates, trapped in some boiler room, condemned to buy and sell companies to the sole financial benefit of their institutional overlord.
The reality, of course, is rather different, but there often comes a time when a private equity team grows too big for its cage and feels the need to spread its wings, making spinning out an appealing course of action.
The most recent high-profile example came last July, when the secondaries team at Deutsche Bank Asset Management, led by Carlo Pirzio-Biroli, Charles Smith, Adam Graev, Chi Cheung and Deirdre Davies, spun out to become Glendower Capital. The firm initially managed the $3 billion of assets it raised at Deutsche on behalf of its former parent, but is set to start raising a fund of its own imminently.
In November, Private Equity International reported that Standard Chartered Private Equity, whose assets are primarily in Asia and Africa, had renewed plans to spin off from its parent and hired Credit Suisse to help it. The firm, which also manages around $3 billion in assets, is expecting to finalise the spinout in 2018.
The desire to spin out doesn’t always come from the team itself. Since the financial crisis many have been driven by the regulatory need for banks to reduce their exposure to illiquid assets. At the same time, banks have a long history of building up private equity capabilities one day and deciding the next that they’re no longer a ‘core’ part of the business.
But if a team does want to spin out, how do they go about it? And what are the potential pitfalls?
A common theme is that making the business case is the easy part. No matter how much a team might want to branch out on its own, nothing can happen unless their interests are aligned with the parent, creating impetus on both sides. If a team is able to clearly communicate this rationale with its LPs (if they have them), then it’s a solid start.
The main difficulty comes in putting the administrative machine together and getting all the cogs to move at the same time – and in the case of a big investment bank or asset manager, there are a lot of cogs. “It takes a week to narrow down a term sheet,” says Glendower’s Pirzio-Biroli. “But the devil is in the details.”
In the case of Glendower and Deutsche Bank, it meant gaining approval from multiple boards internally, as well as legal, compliance, accounting and tax, all under the watchful eye of regulators from three jurisdictions: the UK, US and Germany. In Pirzio-Biroli’s view, his team’s institutional knowledge and a sympathetic ear inside the organisation made all the difference.
“Having been reputable old timers with the bank was critical in being seen as credible counterparts when the bank started to review options,” he says. “As a result discussions were rapid, pragmatic and amicable in nature.”
If a team is fully captive – all its funding comes from the parent – finding the right investors is integral to successfully spinning out. One partner, who was with a firm that spun out in the mid-2000s, suggested keeping the number to a minimum if you possibly can; negotiations are complex enough with one or two backers. The search for investors also serves as an opportunity to look at your own portfolio with an objective eye before negative signals from the market knock you off your perch.
“What is the realistic value of the portfolio today and what will it be in two years’ time? Are these realistic numbers or are they overbaked?” says the partner.
Like so much in life and business, the most important component is people. A spin-out can take years to complete, and morale can’t stay up that whole time unless the process has favourable consequences for every team member, not just a few.
Graham Thomas became chief executive of Stage Capital in 2015, to help it spin out from National Bank of Greece with around €300 million in assets. In a pleasing bit of symmetry, he was brought in by investors Goldman Sachs and Deutsche Bank, the team that later became Glendower Capital.
“Have a hard look at your team and decide who you really need and who you don’t,” he tells PEI. “You’ve got one shot at getting your team right. Make sure you don’t take passengers. Invariably in banks and in slightly less professional private equity operators that might be in-house, there’s an accumulation of people that aren’t necessarily the team you need to take things forward.”
The financial distress and regulatory obligation that drove spin-outs in the wake of the financial crisis has dissipated considerably. But there are still plenty of teams wondering what they could achieve if they opened the door to the cage and stepped outside.
Five spin-outs of note
In February 2009, a HarbourVest-backed management group helped spin out the venture capital arm of Lehman Brothers after the investment bank went bankrupt. It bought the parent’s existing investments and unfunded commitments. In 2012 the firm, now called Tenaya Capital, raised $372 million for its first independently raised fund.
Equistone Partners Europe
Equistone Partners Europe came into being in 2011 when its management team, led by Guillaume Jacqeau, spun the business out from Barclays. The firm raised its first post-Barclays fund in 2013, collecting €1.5 billion for EPEF IV. The management buyout was one of many driven by post-crisis capital requirements which drove the divestment of illiquids.
So big has Ardian grown that it’s easy to forget that it only spun out in 2013. The deal, valued at €510 million at the time of its announcement in March, saw what was then known as AXA Private Equity peel away from AXA Group, the insurance giant. The management team, led by Dominique Senequier, took a 46 percent stake in the new business.
One Equity Partners
One Equity Partners spun out from JPMorgan in 2015 by way of a stapled transaction. Secondaries buyer Lexington Partners bought a large chunk of the firm’s portfolio and committed $500 million for the firm to invest as a standalone entity. It closed its first standalone fund in 2015 on $1.65 billion.
The RBS spin-out Pollen Street was in the news in February as it closed its first post-spin-out fund on £402 million ($555 million; €452 million), having held a first close back in March 2016.The financial-services-focused manager first struck out on its own in 2015 at the second time of asking, the parent rejecting its first attempt.