When London-based Terra Firma took Germany’s Deutsche Annington public last year, the fund owning the investment saw its stake reduced from 82.5 percent to 67.3 percent of the property company. Thus, investors got a partial return.
However, contrary to expectations of a classic full exit, Terra Firma announced last month that the remaining holding owned by the Terra Firma Deutsche Annington Fund (TFDA) would not be sold. Instead, investors in the fund would be given direct shareholdings in the form of ordinary shares on a pro rata basis according to each LP’s commitment.
The unusual exit strategy means investors could now “enjoy the opportunity to take advantage of stock market liquidity to realize returns over their own desired holding period,” stated Terra Firma. As a result, the firm will forego five years of fees on the €2.1 billion fund, which was formed in 2006 and which built up Deutsche Annington into a business owning 180,000 private residential units.
Sources suggested that limited partners were happy with the arrangement, which also has piqued the interest of the fund management community because normally distributing in
specie is limited to distributing liquid securities. “Most of the LPs can’t hold listed shares since these are part of a different allocation (listed stock),” said one European LP. “As a consequence, most LPs start selling and prices drop due to the high supply of private equity holders looking to sell.”
Terra Firma’s case, however, appears to be unique. The Deutsche Annington fund was set up to hold a specific entity, and investors bought into the fund knowing the entity they were buying as opposed to a typical blind pool.
“I Imagine a lot of investors will know the asset well and may want to continue holding that asset in the long term, so it may be investors were much more positive about distribution in specie in this case,” said a fund lawyer. “They may think there is more life left in this investment.”