By Michael Sainsbury

MACQUARIE Group and a syndicate of investors will spend $836 million to buy back the shares of listed private equity vehicle Macquarie Capital, leaving original investors out of pocket, in a move that appears to signal the death knell for listed buyout funds and might also signal a winding back of the listed funds model.

The fund was launched in April 2005 at $4 a share as the private equity boom gathered pace, fuelled by cheap funds and a seemingly inexorable rise of the share market, but like many of its imitators -- including Allco Equity Partners and Babcock Capital -- it failed to deliver on its promise to investors.

It sank to $2.10 last week, although the prospect of a buyback at $3.40 kicked the price up $1.16 yesterday to $3.26.

Macquarie Capital has, since 2005, picked up a range of assets including European directories business Yellow Brick Road, digital media facilities manager Red Bee Media, tyre business AIR-serv and retirement business Regis Group.

"MCAG's businesses have robust medium-term business plans, however, since listing, MCAG's securities have been relatively illiquid and the trading price of the securities has been disappointing," MCAG independent board committee director Ken Moss said.

Now with listed investment funds and financial engineering groups being shunned by investors, Macquarie has decided to take the fund private in the first of what observers think might be a string of privatisations.

Macquarie Group spokeswoman Paula Hannaford would not comment on the prospect of other funds being privatised, but noted that Macquarie Capital was a private equity fund rather than a pure infrastructure fund and therefore unique in the group.

"We have made an announcement about one specific fund," she said.

Macquarie's biggest imitator, Babcock & Brown, has said it will focus on unlisted funds if it can survive its depressed share price and convince banks to continue backing the group.

The Macquarie fund yesterday received an offer of $3.40 per stapled security, valuing the entity at $836.26 million. Investors have already received distributions of 60c from the fund, effectively handing back the listing price of $4, minus any stock market appreciation in a period where the market has been returning more than 20 per cent each year.

Under the proposal, investors can elect to receive $3.40 cash per security or retain their interest in MCAG by opting for one unlisted stapled security in Macquarie per MCAG security.

"Unfortunately in the current market, it has not been possible for MCAG to achieve security price growth," MCAG chief Michael Cook said.

"To address this issue earlier this year, MCAG's board and management began exploring options on behalf of MCAG security holders."

The offer is being made by the Macquarie Advanced Investment Group, which is backed by a consortium of private equity firms.

The consortium comprises AlpInvest Partners, HarbourVest Partners, Pantheon Ventures, Partners Group, Paul Capital Partners, Portfolio Advisors and Procific.

"The consortium investors have among them over $US25 billion ($26.6 billion) of funds applied to secondary private equity investments," Brett Gordon, principal of HarbourVest, said.

"We undertook considerable investigation and analysis of MCAG's portfolio of businesses and we are attracted to the privileged market positions they hold in the sectors in which they operate."

Macquarie Capital's independent directors unanimously recommended the offer to investors, in the absence of a better one, saying it was the best way to maximise investor value in the short term. Macquarie was the first local group to list a so-called private equity fund, but was quickly followed by its main imitators Babcock & Brown and Allco Finance.

Babcock used its fund Babcock Capital fund to buy its largest asset, Ireland's former monopoly telecommunications fund, but that investment has lost its shine, with after-market debt trading poorly.

None of the companies has traded above their listing price for the past 12 months.

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