Terra Firma nears closure of third fund’s liquidity option

The firm is planning to buy out 10% of stakes Terra Firma Capital Partners III's LPs agree to sell.

Terra Firma Capital Partners, a UK buyout firm, is working on a tender offer to give investors in its third fund the option to exit the poorly performing vehicle within weeks.

The firm has sent indicative offers to limited partners in its €5.38 billion Terra Firma Capital Partners III Fund, according to three sources familiar with the deal. The binding round of offers may be held before Christmas.

Terra Firma would also buy 10 percent of the total stakes LPs agree to sell and would pay the same price as other buyers, Secondaries Investor understands.

Terra Firma Capital Partners III has 150 investors from 26 countries, according to the firm’s website.

Terra Firma, which is intending to raise a new buyout fund, targeting about €2 billion, is looking to reduce its 190 limited partners to 20, its chairman and chief investment officer Guy Hands said speaking at sister publication Private Funds Management‘s Investor Relations & Communications Forum: Europe conference in London last week.

“The less investors we have in a fund, the more successful the fund has been,” Hands said. “Once you go beyond 20 [investors], it’s very difficult.”

Credit Suisse has been hired to run the tender offer process, Secondaries Investor has learned. LPs who have committed to the fund include pension funds, endowments, banks and financial groups such as the University of California Regents Endowment Fund and New York City Employees’ Retirement System, according to PEI’s Research and Analytics division.

Terra Firma Capital Partners III is a 2007-vintage vehicle that makes control investments in asset or cashflow-rich companies in complex sectors, mainly in Europe. The fund holds six current investments, including Australian beef producer CPC, British garden retailer Wyevale Garden Centres and Italian solar energy producer RTR, according to Terra Firma’s website.

The fund had a negative net internal rate of return of 10.4 percent and a return multiple of 0.55 x as of 30 June, according to a performance report from the Oregon Public Employees Retirement Fund, an investor in the fund.

One of the fund’s biggest investments was music company EMI Group, which it bought in 2007 for £4.5 billion ($6.8 billion; €6.3 billion). The firm lost about £1.75 billion of equity through the deal when Citigroup, which had provided loans to fund the buyout, seized the company after Terra Firma defaulted on the loan.

General partners are increasingly using the secondaries market to offer liquidity to existing investors or to aid fundraising through staple deals. In August, Credit Suisse advised London-based Palamon Capital Partners on a deal in which investors in the firm’s second fund were given the option to sell stakes to new buyers who also committed to the firm’s latest fund, Secondaries Investor reported.

Terra Firma and Credit Suisse declined to comment.