Last May, London-based private equity firm Terra Firma ripped up the rulebook when it offered limited partners in the single-asset fund owning German private owner Deutsche Annington the chance to take their distribution in the form of shares in the company instead of cash.
Terra Firma listed Deutsche Annington, which owns and rents out German apartments, in July 2013 on the Frankfurt Stock Exchange offering €575 million in shares. Following the IPO, the fund’s stake was reduced to 67.3 percent. But, back in May the firm, looking for an exit, allocated investors ordinary shares in Deutsche Annington, pro rata to their interests in the fund, as a way of allowing investors to cash out from the company at a time of their own choosing.
This exit strategy crystallized a 1.9x gross cash-on-cash multiple for the investment or around €4 billion, but every one of the investors decided to go for the share option rather than cashing out.
By accepting shares, the Abu Dhabi sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), became the largest shareholder in Deutsche Annington holding a 13.4 percent stake. On May 19, the day that Terra Firma announced that it was making the distributions ‘in specie’ – meaning the company would be handed off to investors in its present form rather than selling it and divvying up the cash proceeds – Deutsche Annington’s peak share price was €21.39.
However, not all investors were too impressed with Terra Firma’s exit strategy. “I expect this to be a wider industry problem as more private equity funds IPO [initial public offerings],” said one European institutional investor. He saw payments in kind not as a way of providing optionality to investors, but rather as passing the buck as to when to sell.
But, for the sovereign wealth fund, having the choice of holding on to its stake could barely have worked out better. ADIA decided to fully cash out of the company last month selling its remaining 6.6 percent stake for €750 million – for a price just shy of €32 per share. The firm had earlier sold down some of its stake from the 9.49 percent it held as of 30 March. Some quick number crunching reveals that on just ADIA’s 6.6 percent shareholding they would have received a capital gain of more than €244 million by taking the shares, add to that the extra gain they received on each subsequent share sell down. So by being given the option of when to exit, Deutsche Annington has gone from a good investment to a grand slam homerun.