PRIVATE EQUITY FIRMS HAVE BEEN IN THE SPOTLIGHT lately for all the wrong reasons. The sharpest example is Mitt Romney’s Bain Capital and its controversial methods of turning around portfolio companies. There’s also a class-action lawsuit alleging that 11 of the world’s largest private equity shops colluded during the boom years to drive down the prices of takeover targets.
Making things worse, in the 2008 financial crisis many big investors felt firsthand what the illiquidity of private equity really meant. Many needed to raise cash by selling other assets such as equities just to make good on their commitments to private equity firms. Along with other problems, including high fees and a lack of transparency when it came to underlying strategies, that experience prompted investors to rethink exposure to the asset class. Fundraising has become slower as they delve into firms and strategies more fully. The average time for a private equity fund to close reached 16.8 months as of September, according to London-based alternative-investment research firm Preqin. In the middle of the last decade, closing often took just a few months.
But private equity remains attractive to pension funds and other institutions that need healthy returns to make good on their retirement promises to workers. To avoid the pitfalls revealed during the credit crisis, investors are working with fewer private equity firms, targeting smaller funds and giving money to managers with expertise in select industries or in regions such as Asia and Africa.
| Searchlight’s Oliver Haarman |
Searchlight Capital Partners, which launched in late 2010, is benefiting from an appetite for smaller and more flexible private equity funds. Despite slow fundraising that required repeated meetings with investors, Searchlight gathered $860 million in committed capital and closed its fund in March. It doesn’t hurt that its founders spent years at top-flight shops. Oliver Haarmann, a former partner at New York’s KKR & Co. who helped build out that firm’s European operations from London, teamed up with Erol Uzumeri, who ran Teachers’ Private Capital, the famed private equity arm of Ontario Teachers’ Pension Plan. Searchlight’s third partner is Eric Zinterhofer, previously co-head of New York–based Apollo Global Management’s media and telecommunications business.
“We went nonstop for 18 months,” recalls Uzumeri of the fundraising drive. “It was a 24-7 exercise.” He adds that Searchlight is setting itself apart with a smaller fund that can invest in a variety of ways — its sweet spot is $500 million to $1 billion in assets — avoiding direct rivalry with the partners’ former employers and other huge private equity funds. “We’re not competing against the brand names in fundraising,” Haarmann agrees. “Institutional investors put us in a very different bucket than they would a large buyout firm.” Searchlight will do deals including majority and minority private equity and investing in debt, Haarmann says. It operates throughout Europe and North America, and also has offices in New York and Toronto.
Investors are demanding that private equity firms better align both parties’ interests. Uzumeri says Searchlight structured its fund to meet transparency and reporting standards laid out by the Institutional Limited Partners Association, a Toronto-based trade group. Another challenge is the trend of institutional investors’ retaining fewer private equity managers. If investors are whittling away at their rosters of managers, it makes pitching a start-up that much tougher, Uzumeri notes.
Even before the final close of the fund, Searchlight took a majority stake in Edinburgh-based Hunter Boot, which specializes in now-popular Wellington rubber boots. “We had identified a thesis of looking at investing in certain brands,” Uzumeri says. “Hunter was a good example. It grew through the recession and took market share.” He adds that Hunter is a five- to seven-year investment; Searchlight will grow the brand internationally and expand its product line.
Playing on the theme of broadband growth in North America and Europe, the firm joined forces with Englewood, Colorado–based cable provider Liberty Global to buy OneLink Communications in June. The parent company of San Juan Cable, OneLink should merge with Liberty Cablevision of Puerto Rico later this year to become the island’s largest operator. Uzumeri says he and his partners concentrated on acquiring the telecommunications business at a good valuation and financing it conservatively. “It is a great cash flow generator,” he explains. “From our perspective there is a good margin for error.”
Last month Searchlight bought a stake in Integra Telecom, a Portland, Oregon–based provider of fiber-based networking services. Haarmann says he wanted an asset central to companies’ data consumption and their need to expand globally. “Every business is becoming more data-intensive,” he notes. “Every UPS driver walks around with an iPad, sending and receiving data all day.”
Launching a money management firm can be all about timing, but it’s still too early to tell whether Searchlight chose the right moment. “If you want to be successful, you have to defy conventional wisdom,” Haarmann says. “If everyone is telling you you can’t raise money, then maybe you should do it.”
