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Deal insider: Investors resist the lure of Princess

Issuer: Princess Private Equity Holding

Issue type: Principal guaranteed convertible into private equity

Amount: $600 million

Bookrunners: ABN Amro, Deutsche Bank Take a fashionable but illiquid asset class like private equity: it is difficult for most investors to access and risky, but offers the potential for fabulous returns. Turn it into a fixed-income security so it can be bought by European investors that are unwilling or unable to dabble in equity. Finally, dress it up with a principal guarantee to make it irresistible to conservative investors who are nevertheless desperate for greater yield. The result can only be a sure-fire winner. Or can it?

The first zero-coupon bond convertible into a private-equity vehicle with principal guaranteed by a triple A rated reinsurer met with a somewhat sceptical response when it was launched last month. Perhaps the structure was just a little too esoteric for investors. Or maybe they sensed that behind almost every principal-guaranteed bond lies an overpriced option.

The $600 million deal was issued by Princess Private Equity Holding, a Guernsey-listed vehicle that will invest the proceeds in a variety of private-equity funds. After eight years the bonds, priced at par, can be converted into Princess shares.

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