In the case of Permira, its founder investor, SVG Capital, also a quoted company, found itself with similar capital constraints. However, because SVG is an LP in Permira, not the GP like Candover, the renegotiation that ensued simply scaled back the size of the fund. As we have emphasised above, it is important to understand that the failure of a fund does not mean that its investments will also fail, unlike in most corporate structures. There is no guarantee from the investments to the fund. There may be adverse impacts due to a lack of follow-on funding for example, but the private equity fund structure acts to contain, not disseminate, risk. In extremis the investment agreement usually has a ‘divorce clause’ that allows investors to terminate the agreement if (typically) 75% by value of the committed investors agree to do so. There is virtually no evidence or research in academic studies regarding the failure rates of private equity fund managers, in part due to the rarity of its occurrence. 2.1.16 Where do private equity fund managers operate? Since the mid-1980s many of the larger private equity fund managers have opened overseas offices in order to source deals internationally. In the 1990s, US private equity funds began to establish European offices, predominantly in London. Today the largest private equity funds operate in a market funded by international investors as private equity markets have developed worldwide. The UK private equity market is the second largest in the world after the US (Figure 2.7).
53 Private Equity Demystified: an explanatory guide Figure 2.7: Investment $bn by country January 2006–July 2014 (exc. US; countries with at least $5bn invested) Source: Preqin. 2.1.17 Why have European private equity funds been based predominantly in the UK? Private equity fund managers require four necessary conditions to operate: • availability of funds to invest; • opportunities to make investments (‘deal flow’); • people with the necessary skills to source, negotiate, structure and manage investments; and • the availability of exit opportunities (stock market, M&A market). Each of these necessary conditions is met in the UK. However, the number of alternative locations worldwide where they are also met is increasing due to the globalisation of both financial markets and professional service firms. The choice of the UK is therefore increasingly dependent on a complex interrelation of other economic, legal and cultural factors, including: • Economic environment: local costs and benefits and the overall economic infrastructure of the location are very important. Private equity funds are heavily 0 50 100 150 200 250 300 UK Germany France China Canada Netherlands Australia Switzerland Japan Italy Sweden Spain India Bermuda South Korea Brazil Norway Singapore Ireland Belgium Denmark Hong Kong South Africa Russia Austria Israel Turkey Taiwan Luxembourg New Zealand Nigeria Total Investment ($bn)
54 Private Equity Demystified: an explanatory guide
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