The move, in which HarbourVest appears to have gained control of at least 51.2% of SVG’s shares, means SVG – one of the UK’s best-known and longest-serving private equity investors – is likely to go into run-off.
It is a far cry from the organisation’s early years, when SVG spun out of Schroder Ventures and was listed on the London Stock Exchange in 1996. Given its origins, it was happy to invest in Permira, which also came out of Schroder Ventures, and co-founder and City veteran Nicholas Ferguson, a founder of Permira, was appointed chief executive.
In 1997, SVG made a commitment of €187 million to Permira’s first European fund. It followed this up with a €750 million commitment to Permira Europe II in 2000 and a €658 million commitment to the firm’s third fund in 2003.
Riding high, the relationship between the two firms was cemented further in 2005 as Permira, at the time one of Europe’s best-performing private equity firms, took a 4.7% stake in SVG. As part of the terms of the deal, SVG agreed not to invest in any other third-party funds and Damon Buffini, then managing partner of Permira, joined SVG’s board. Permira funds constituted 78% of SVG Capital’s net assets at the time.
As the buyout industry grew, the relationship blossomed. In 2006, SVG Capital committed up to €3.8 billion to Permira IV, at the time the largest recorded investment in a buyout fund from a single investor. When SVG made the commitment, the firm’s share price, at 815p on October 24, 2006, was nearing its peak and trading at a premium to net asset value.
The commitment, which accounted for 38% of Permira’s fourth fund, came after SVG had won the right to commit an unlimited amount of capital to any fund that Permira raised. The commitment meant that Permira funds now accounted for 85% of SVG’s assets by value. In 2007, the firm was still trading at a premium to net asset value, with the share price reaching a high of 942p in May that year.
But such concentration in one fund manager left the investor overly exposed when the financial crisis hit. The portfolio of SVG Capital fell in value through the first half of 2008 after several writedowns, which saw the firm’s share price plummet to a low of 190p in December 2008 and at a discount to NAV of almost 80%.
SVG began talks with Permira after its strategy to deliberately commit more capital than it had left it stretched. It had committed more than £1.3 billion to private equity funds but had only £911 million available to meet the capital calls. Around late 2008, an agreement was reached whereby SVG renegotiated its exposure to Permira and cut its commitments by more than half.
Amid heavy writedowns in its portfolio, SVG was forced to take other action. In an effort to strengthen its balance sheet, it launched a heavily discounted rights issue.
Sensing a bargain, secondaries investor Coller Capital in early 2009 paid £50 million to become the biggest shareholder in SVG Capital. Coller bought a 23.92% stake in the firm in a deal that sparked speculation that Coller would take SVG private and potentially stop its future investments.
Around the same time, SVG insisted its relationship with Permira would remain the same as it emerged Buffini would be leaving his position as chairman of SVG’s board. Lynn Fordham, SVG’s finance director, was appointed chief executive.
In March 2009, the company announced it had reduced its leverage from 70% of NAV to 25% after raising £171 million in its rights issue. It cut its commitments to £493 million. On March 19, the firm’s shares were trading at a record low of 73.5p.
In August 2009, the investment firm said it would hold off from making any new commitments to private equity firms amid a quiet period for returns from the buyout industry. It would be a status the firm maintained for several years.
After surviving a tough period, SVG’s portfolio started to improve in 2010, when in March and August it announced rises in the value of its portfolio. The share price recovered to an extent, hitting 150.60p on August 20, 2010 but remained well below its 2007 peak.
The improving valuations continued, and in February 2011 the firm said its net asset value had grown by 41.7% the previous year as a result of improved performance at Permira’s portfolio companies. But as of December 2011 it admitted it was still not ready to invest again.
A rethink of the firm’s strategy resulted in a proposal in March 2012 to reduce its exposure to Permira in favour of investing with a wider pool of managers. Activist investors, led by Coller, failed in their attempt to halt plans by SVG Capital to alter the strategy, with two-thirds backing the decision to change course.
In October of the same year, it emerged that SVG had sold its holding in one of Permira’s funds, and in February 2013 it announced a €100 million commitment to European buyout firm Cinven’s fifth fund. That same month it also sold a 50.1% stake in its SVG Advisers arm to Aberdeen Asset Management.
The relationship with Permira did not die. In April 2014, SVG announced that it was increasing the money it was committing to Permira’s fifth fund by €25 million, bringing its total commitments to Permira to €125 million. The contribution meant that SVG still remained Permira’s largest investor. In the same month, the share price hit about 420p a share.
But there was little doubt the relationship could never be what it once was. In August 2014, Permira sold its stake in SVG and Fordham said SVG was looking to eventually invest with six to eight managers.
Improved valuations continued and SVG enjoyed a record amount in cash distributions from its private equity managers for the 13 months to the end of January 2015. The firm, which received £330 million of distributions, said the strong performance was driven by a “favourable exit environment” and that it benefited from the sale of companies owned by Permira such as Hugo Boss. The share price surpassed 440p for the first time since October 2008.
But shareholders were not happy. In May 2015, SVG Capital suffered a bloody nose at its annual general meeting, as 32% of shareholders voted against the re-election of Fordham. The chairman of SVG, Andrew Sykes, also failed to secure the backing of nearly 49% of investors.
Valuations improved again in the year to January 31, 2016, but the long slow road to recovery had set the scene for HarbourVest to pounce. Its offer, which values SVG at £1.015 billion, looks set to fire the starting gun on a wind-down of the operation. HarbourVest said it would be looking to “manage down” the portfolio over 10 to 12 years.
SVG’s share price jumped to 650p per share on the news, but the rally could be too late to secure its long-term future.
With reporting by Paul Hodkinson.