How a professional Private Equity company carries out a secondary operation on a direct investment portfolio BdW

Success Story

AXA Private Equity, the capital management arm of the AXA Group specialising in investments in unlisted companies, spans all types of private equity: LBO, Venture Capital, growth expansion, recovery and Funds of Funds. Drawing on the professionalism at the core of all its activities, it managed to acquire 100% of the stakes in a fund managed by BdW, one of the oldest unlisted investment companies in Germany.

Business in the secondary market (purchase of stakes in private equity funds and direct investment portfolios) has been booming for some years in Europe and the United States, driven by a number of factors including the over-allocation of capital during the financial bubble at the end of the 1990s and the ensuing liquidity crunch. Other structural factors have also fed the market such as the new Basle II capital adequacy requirements, and the perceptibly higher level of risk inherent to private equity in general.

AXA Private Equity has been using specialist investment funds to expand its Secondary Funds business since 1998: AXA Secondary Fund I (ASF I) and AXA Secondary Fund II (ASF II), which were launched with leading international investors in 1999 and 2001 respectively. With more than USD 700 million now under management, these funds have concluded 34 transactions with European and US vendors since 1999.

At end-2003 and with the support of AXA Private Equity and the Frankfurt and Paris teams in particular, ASF II completed the 100% purchase of stakes in the BdW KG fund, which was managed by one of the oldest German investment companies in the fields of medium-sized Growth Expansion and LBOs. BdW’s portfolio currently numbers around 40 participations in German companies, with a total balance sheet value approaching EUR 175 million. Its shareholders – Dresdner (following its acquisition by Allianz) and three other institutional investors – wished to refocus on their strategic activities and sell their stakes in BdW.

AXA Private Equity brought a vast range of skills to the deal, which helped it achieve agreement between the various parties

• Firstly, its high profile on the European private equity market and the excellent reputation of its parent company enabled AXA Private Equity to be the first company to establish contact with the BdW KG shareholders. This gave AXA Private Equity a lead of several months over other potential buyers in terms of understanding the vendor and due diligence constraints. AXA Private Equity’s other advantage was that it could offer medium and long-term career opportunities to part of BdW’s existing management team.
• With 20 staff in 4 offices, including 3 in Frankfurt, and most of BdW KG's participations being unlisted German SMEs, a second advantage possessed by AXA Private Equity was its due diligence capacity.   Its local office was ideally placed to gather and analyse the data necessary to conclude the deal.
• Finally, the team’s experience in structuring transactions and keeping to the required timetable (a major condition in this case) helped it design a proposal that satisfied the vendors, while at the same time optimising the final gain to ASF II investors.

It is worth noting that "direct" secondary transactions involve a number of complications that are absent from transactions involving portfolios of interests such as the coordination of a wide range of legal (audit of fund participations, transfer authorisations, filing of details with anti–trust authorities, etc.), tax (country-specific) and managerial (restructuring the existing management team) skills.

Having added significant value in the negotiating process, AXA Private Equity then continues the value creation process through the active management of the acquired portfolio investments.

Thus, as soon as the agreement was signed with the vendors, AXA Private Equity set up a new Partnership Agreement and nominated a new General Partner responsible for managing the acquired portfolio investments to the best effect. Several former members of the BdW team were recruited into the new team for this purpose, backed by a supervisory committee comprising AXA Private Equity members.