EDINBURGH, Scotland – European Strategic Partners (ESP), the $1 billion targeted fund-of-funds that is the first fruit of a joint venture between Standard Life and Hamilton Lane Advisors, aims to provide a broad constituency of international investors with exposure to a diversified portfolio of premier European private equity vehicles and direct investments.
In Europe, as in the United States, it is increasingly the case that only the larger and most experienced investors can access certain fund opportunities. With a reputation as one of the most experienced private equity investors in Europe, Standard Life benefits from access to vehicles at an early stage of the fund-raising process. Hamilton Lane, as a leading global private equity manager and investment adviser, continuously reviews a broad universe of investment opportunities and enjoys access to a significant proportion of top-tier private equity funds.
Together, the joint venture partners have screened more than 1,750 fund and direct investment proposals and have made, managed or recommended a total of $10 billion in commitments to 157 funds and 40 direct investments, on which they have achieved outstanding returns. A $2.4 billion portfolio of investments made before the end of 1996 returned a composite net IRR of 23.9% per annum between 1989 and 1997.
ESP will be managed by Standard Life Investments (Private Equity) Ltd., a newly formed Standard Life subsidiary that will receive investment advice from Hamilton Lane International. Investments will only be made when unanimously approved by the manager’s investment committee.
The investment committee members are Jonny Maxwell, who has managed Standard Life’s private equity portfolio since 1989; David Currie, who joined Standard Life earlier this year from the Abu Dhabi Investment Authority, where he had been senior investment controller of the European private equity portfolio since 1991; Leslie Brun, the chairman and founder of Hamilton Lane Advisors; and Marco Giannini, president and chief operating officer of Hamilton Lane Advisors since 1993. Four further investment professionals
Standard Life will commit GBP250 million ($412 million) to ESP and, to avoid potential conflicts of interest, will make no new European private equity commitments on its own account during ESP’s investment period.
While ESP’s principal focus will be on European private equity funds, encompassing both mature and developing private equity markets, as much as 10% of the fund-of-funds may be deployed elsewhere, primarily in Asia and Latin America, if compelling opportunities emerge.
A notable feature of ESP is its atypically high allocation to direct investments, which will comprise as much as 40% of its portfolio. Most of the fund’s direct investments will be in buyouts backed by investee funds, but the advisers will ensure a degree of diversification in the fund-of-fund’s direct component, as well as in its portfolio of fund positions, by seeking opportunity across the entire private equity spectrum.
Discussing the rationale for the direct investment component, Mr. Currie said that a strategy of using fund investments as a platform to make direct co-investments alongside general partners would give ESP the opportunity to leverage its overall position. While applying its own rigorous due diligence criteria to direct investment opportunities, ESP also will benefit from the local expertise and contacts of the managers of its investee funds. At the same time, ESP’s potential role as a non-competitive co-investor, as well as a source of capital, is likely to reinforce the fund-of-funds’ appeal to general partners.
Formal fund raising for ESP began in November. Commenting on the timing of the exercise, Mr. Maxwell said that ESP would be in a position to benefit from the more realistic valuations that should prevail in private companies following the recent stock market pricing corrections.
BT Alex. Brown International is acting as placement agent for ESP, which is being marketed in Europe, the U.S., the Middle East and Asia. Mr. Currie said a first close would be held once commitments for “a reasonable amount in relation to Standard Life’s commitment” are in place, probably toward the end of the first quarter of this year.
Structured as a Scottish limited partnership, ESP will have an investment period of four years for fund commitments and six years for direct investments. The fund-of-funds’ initial life will run for 10 years from the end of the investment period for fund commitments, with as many as three one-year extensions thereafter.
ESP has been structured to provide what its managers believe are the most economical terms available in the current market. Management fees are well below the market standard at 0.75% of aggregate undrawn capital, rising to 1% on drawn down commitments. The general partner will receive a 15% share of the carry on direct investments and a 5% share on fund investments.