Pantheon backs £60m Candover spin-out

Gerry Grimstone will step down as chairman of Candover Investments as the investment team breaks away to form a new entity, Arle Capital Partners.

Candover Partners is to be sold to its management team in a secondaries deal backed by fund of funds and secondaries investor Pantheon. The deal is one of 2010’s highest-profile spin-outs in Europe.

Candover Partners is the private equity firm wholly owned by Candover Investments, a London-listed investment trust. The firm will be sold to a new entity, Arle Capital Partners, led by John Arney and comprising the entire 25-strong Candover Partners team.

The deal will end what has been almost two years of speculation about Candover’s future. The firm, which was formerly one of the most prominent names in European private equity, has become the region’s highest profile casualty of the global financial crisis as it was brought down by an under-funded parent company and falling net asset values.

As part of the deal, Pantheon and the Arle team are set to acquire a “strip” of assets from the listed parent company for £60 million (€71 million; $94 million), according to a statement from Candover. The “strip” comprises stakes in the 13 existing portfolio companies under Candover’s management, or nearly a third (29.1 percent) of the listed parent’s investment portfolio. The price represents a discount of around 14.3 percent to the £70 million carrying value of the assets.

Elly Livingstone, a partner at Pantheon who leads the firm’s secondaries activity, described the price as “in line with the market”.

The spin-out of Arle ensures “Candover’s portfolio continues to be managed by an experienced team who are focused on maximising returns”, the firm said in a statement.

Ensuring the management team is sufficiently incentivised was “central to the discussions,” said Livingstone. The management will put up £4 million of the £60 million price tag with the remainder accounted for by Pantheon. They will, said Livingstone, have “skin in the game”.

The Arle team is now in a position to work towards the goal of raising another fund, although this is not part of current plans, said a spokesperson for the new firm.

Livingstone described the deal as “a very significant transaction” for Pantheon, which in October closed its fourth global secondaries fund on $3 billion after almost two years of fundraising.

The firm has funded a number of spin-outs from banks and corporates and is understood to be behind last week’s establishment of Goldman Sachs spin-off, New Mainstream Capital.

For the listed parent company, Candover Investments, the sale means a stronger balance sheet with a smaller net debt level and reduced outstanding commitments to Candover funds to the tune of up to £11.2 million. The listed investment trust has also confirmed that it will cease making new fund commitments and instead return its capital to shareholders over time.

The deal will also see the departure of Gerry Grimstone, who has been chairman of Candover Investments for four years.

“Given these important changes,” said Grimstone in a statement, “I have decided that after 11 years on the Candover board, four as Chairman, the time is right for me to announce my intention to step down.”

“A tightly focused Candover,” Grimstone added, “with a resolved operating model, is the best platform from which to deliver to shareholders the significant value in the underlying investments.”

Iain Scouller, an analyst with Oriel Securities described the deal as a good development for both the listed trust and the management team. “Whilst it is always disappointing to see investments being sold at below the previous valuation, we think that the sale is helpful in further strengthening the balance sheet with net debt falling to £16 million on a pro-forma basis, compared with £59 million [in June].”