Terra Firma buys out LPs

Terra Firma, the UK buyout house run by Guy Hands, has bought three limited partners out of its 2007 fund at “a small premium” to the face value, according to a source familiar with the matter.

The three fund interests, which between them are liable for €25 million in uncalled commitments, were bought by the fund’s management company.

Guy Hands, who was already one of the four largest investors in the fund, had been in discussion with each of its 170 LPs to ask if they have the liquidity to meet future capital calls. The sellers comprised two large institutions and one family-owned group.

By taking the unusual action of buying stakes from cash-strapped LPs, Terra Firma is avoiding the problem of defaulting LPs and or the need to pre-emptively shrink the fund’s size: a course of action which means lower fee revenue and potentially forces a change of fund strategy.

A combination of factors – including slowing cash distributions and the denominator effect – has forced many LPs to reduce their exposure to private equity, either through selling fund interests on the secondaries market or negotiating with GPs to scale back their commitments.

Last week Candover, another large UK-based buyout house, revealed it would have to shrink its 2008 fund, for which it had raised almost €3 billion of its targeted €5 billion. Its largest single LP, the listed feeder fund Candover Investments, said it would reduce its €1 billion stake “significantly”.

Global buyout houses Permira and TPG have both also taken measures to allow illiquid LPs to scale back commitments to their funds.

Around 50 percent of capital has been called from investors in the €5.4 billion Terra Firma Capital Partners III, which has so far made three investments, most notably the problematic buyout of music group EMI in 2007.

Terra Firma declined to comment.