When Dutch insurance and banking giant ING decided in 2004 to divest significant portions of its private equity business, the managing partners of Baring Private Equity International were faced with two key dilemmas: fund ownership and branding.
On the one hand, the management team was confronted with the issue of whether to buy out the firm in its existing state as a centralized entity or if Baring should be restructured to allow the partners to possess direct ownership over their respective regional funds. On the other hand, the partners also needed to decide whether to retain the Baring name across the board, or to adopt distinct identities for the Western European, Central European, Iberian, Russian, Asian, Indian, and Latin American teams.
Taking into consideration the preferences of the Baring team and LPs, the partners adopted an ownership structure to allow the vast majority of carried interest to be awarded to the local fund managing team, with a very small portion of carried interest to be shared among the senior partners who own Baring Private Equity International. ?We did this interesting buyout where the regional companies have taken control of their own destinies while becoming part-owners of a central company says John Dare, the London-based chairman of Baring Private Equity International. ?BPEI acts as a clearinghouse for the partners and handles some small central duties, but the administrative side has devolved to each individual region.?
The decentralized structure of the post-MBO Baring responds to LPs' increasing preference to invest in funds that are owned directly by the fund's partners, rather than by an umbrella entity. ?In the past, when Baring was centralized and owned by ING, some investors were apprehensive about what that meant, says Dare. ?Now it's very clean and very clear. Investors like to see the partners be responsible for their own affairs and responsible for their own investments.?
The result was the creation of a ?global federation, according to Michael Calvey the Moscow-based managing partner of Baring Vostok Capital Partners. Baring's partners view this structure as a unique framework encompassing the best of both worlds. Each regional team enjoys the benefits derived from identifying with a global brand and having access to a global team of professionals for ideas and counsel. Meanwhile, nearly all of the carried interest of the funds is retained at the regional level as motivation for the team operating on the ground. The strategy was adopted to mitigate possible concerns or skittishness from existing LPs while creating a stronger platform for an across-the-board push to realize current portfolio holdings and raise new funds.
?It's such a widespread group of private equity management companies that trying to centrally manage them – which was perfectly sensible when we were building the business -became less practical?
Mark Hawkesworth, managing partner of Baring's Western European group based in London, views the decentralized structure as part of Baring's natural evolution as it increasingly establishes itself as a global firm. ?It's such a widespread group of private equity management companies that trying to centrally manage them – which was perfectly sensible when we were building the business -became less practical, he says.
Even before the spin-off took place, the various regional groups had already enjoyed a degree of autonomy. Most of the Baring management companies created their own relations with service providers and managed their own investor relations services. Nearly all of the administrative and operational activities took place at the ground level by the partners of each fund. According to the managing partners of the regional funds, the administrative and compliance structure has remained the same since the spin-off, with one major difference being that each team is now in charge of its own budget.
In recent years, the international private equity operations of Deutsche Bank, Commonwealth Development Corporation JP Morgan, and other financial institutions have also encountered similar dilemmas as the parent institutions sought to divest non-core businesses. However, Baring Private Equity International seems to be the sole example of a private equity firm that decided to combine a global branding strategy with highly decentralized investment and administrative operations.
Whether or not to keep the Baring name was a straightforward discussion in 2004. The Baring partners unanimously agreed maintaining the Baring name would be instrumental in providing continuity for LPs and ensuring the continued success of each regional operation. According to Calvey, being affiliated with a recognized global entity is even more important when fundraising and investing in Baring's key markets – most of which are with-in emerging economies.
The recent ramp up in Baring's fundraising activity demonstrates that the structural change of Baring Private Equity International has not deterred LPs – both existing and new from committing capital to new Baring fundraising efforts.
Part of the reason for the calm transition was the decision to continue operating under the Baring umbrella, despite the decentralization of investment activities. The managing partners chose to do this in part to offer continuity to investors by sending LPs the message that ?business would continue as usual, says Hawkesworth. The partners also felt that the Baring name had built up an unquantifiable but significant amount of goodwill and was established as a highly influential name in the private equity business.
In the experience of Baring's Russia group, retaining the Baring brand has also been instrumental in hiring quality managers for the Russian portfolio companies. ?The managers like to see that they are joining part of a larger global presence, and more than just a small group based in Moscow, says Calvey
Since Baring Private Equity International's spin-off from ING was completed in August 2004, Baring has engaged in a fundraising full-court press, raising nearly $700 million in capital for new private equity funds. This amount represents more than 20 percent of funds raised since the firm's inception in 1984. The partners at Baring believe that the successful drive in fundraising is due to the firm's new structure, which has preserved the goodwill attached to the Baring name while fostering independence and a more robust incentive system for the funds' managing partners.
Given the roughly 13 ratio of new capital raised post-MBO versus the amount raised pre-MBO, as well as a strong flow of exits generated since the spin-off, the partners at Baring view the new structure of the firm as a success in catering to the needs of each regional group's operations. ?The increase in motivation has been tremendous, and I think the proof is in the fundraising and investment success we have seen so far, says Dare. ?Instead of working for a subsidiary of a large banking group, they took over their own businesses and are working for themselves.?
Since virtually all of the marketing and investor relations activities of the funds are performed at the regional level, each group is free to push forward its own fundraising agenda, independent of the allocation of resources found in a more centralized structures. Consequently the Baring teams in Russia, Spain and India have closed on $695 million in new funds since the spin-off from MBO, and the Latin America and Asia groups are currently seeking a total of $800 million for new funds.
From a more practical standpoint, one of the drivers of Baring's increased fundraising capability is that the local partners are no longer obligated to submit performance reports and other paperwork to ING on a monthly basis. With the cutback in paperwork, Hawkesworth finds that his team in Western Europe is able to allocate more time to talking with LPs.
Meanwhile, not only is maintaining the Baring branding across the board helpful from a marketing standpoint, but it also accurately reflects the high degree of collaboration taking place between the regional groups. For instance, the managing partners of the Russian, Asian, and Indian funds all sit on one another's investment committees and exchange advice about portfolio company management. The regional partners also collaborate in such matters as deal and exit sourcing, as well as advising the management of portfolio companies. On the fundraising front, the partners contribute to a group data-base of institutional investors as a method of collectively monitoring investor appetite around the world. ?These are people that interact all the time, says Dare. ?At the moment, the relationship has remained virtually as close as it was before we did the buyout.
Going forward, it is clear that the management companies comprising the Baring confederation will expand at differing rates. How-ever, due to Baring's structure, the ebb and flow of funds to a particular group will be determined primarily by investor appetite, rather than the top-down allocations of regional fundraising resources that often takes place in private equity firms active on a global scale.
BARING PRIVATE EQUITY INTERNATIONAL
Date of management buyout: August 2004
Investment professionals: 50
Total capital under management: $3 billion
Number of funds under management:14
Capital raised since management buyout:$695 million
Number of new funds closed since mbo: 3
Number and target size of new funds being raised: 3; Asia
($400 million), Latin America ($400 million, 2 funds)
Regional managing partners and funds:
Baring European Private Equity Fund:€120 million (1999);
Baring English Growth Fund: £66 million (2000)
Baring Central Europe Private Equity Fund:€86 million (1999)
Baring Asia Private Equity Fund: $305 million (1999)
Baring Asia Private Equity Fund II: $257 million (2002)
Baring India Private Equity Fund: $40 million (1998)
Baring India Private Equity Fund: $175 million (2005)
Baring Latin America Private Equity Fund: $40 million (1999) Baring Mexico Private Equity Fund: $46 million (1999) South America Private Equity Growth Fund:$180 million (2001)
First NIS Regional Fund:$160 million (1994)
Baring Vostok Private Equity Fund:$205 million (2001)
Baring Vostok Private Equity Fund III: $400 million (2005)
José Angel Sarasa
Baring Iberia I Private Equity Fund: €60 million (1998)
Baring Iberia II Private Equity Fund:€97 million (2004)
Two firm-wide meetings per year Frequent bilateral communication between regional groups
Inter-group advisory collaboration:
Russia – Asia – India Spain – Latin America Western Europe – India
In-house responsibilities of note:
Investor relations, fund raising, budgeting, portfolio management