page 28 private equity annual review <strong>2010</strong> s to r i e s o f t h e y e a r j a n | f e b | m a r | a p r | m a y | j u n e | j u ly | a u g | s e p | o c t | n o v | d e c g f c c a s u a lt y n o . 2 Closure for Candover After a distressing two years of searching for options, London-listed Candover opted to spin off and wind down In what was set to become one of the highest-profile spin-outs of <strong>2010</strong>, Candover Investments revealed in early December that it would sell off its private equity management firm – Candover Partners – to the firm’s management in a secondaries transaction backed by Pantheon. Since 2008, Candover had battled against falling portfolio valuations, the loss of one of its largest investments in yacht-maker Ferretti and vast overcommitments by the listed parent company, Candover Investments, to Grimstone: bowing out funds run by Candover Partners. Funding problems at the highly geared parent company meant it could no longer honour a €1 billion commitment to Candover’s 2008 fund. This ultimately led to the fund being disbanded and the vast majority of the €3 billion already raised being cancelled in late 2009. From this point on, the company grappled with the problem of how to move the company forward. It held talks with potential suitors, the most promising being with Canadian pension investor Alberta Investment Management Corporation (AIMCo). These talks, however, broke down in July. When Candover released its half-yearly report in September it said it would become a realisation vehicle and focus all its efforts on returning cash to investors. As part of the deal unveiled in December, fund of funds and secondaries investor Pantheon teamed up with the Candover Partners management team – who reformed under the name Arle Capital Partners – to buy the management company for a nominal fee. Pantheon and Arle would also acquire a “strip” of assets from the listed parent company for £60 million (€71 million; $94 million), Candover said in a statement. The “strip” comprised 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 represented a discount of around 14.3 percent to the £70 million carrying value of the assets. The spin-out of Arle ensured “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 Elly Livingstone, who heads up Pantheon’s secondaries activity. The management of Arle put up £4 million of the £60 million price tag with the remainder accounted for by Pantheon. The management team, said Livingstone, would 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 the establishment of Goldman Sachs spin-off, New Mainstream Capital, which was also revealed in December. For the listed parent company, Candover Investments, the sale meant 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 deal also saw 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].” ■
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