A public affair

If you need further proof that private equity is a complex, global market, look no further than the IPO of Conversus Capital.

The creation of Conversus saw a corporation based in Charlotte, North Carolina sell off a portfolio of private equity fund interests to a limited partnership based in Guernsey that in turn sold units on the Amsterdam Euronext exchange. The Guernsey partnership also sold units to two US non-profit institutions and will be managed jointly by teams based in Chicago and in the California towns of Roseville and Menlo Park.

Those public investors who bought into Conversus got a stake in a “portfolio of seasoned private equity fund interests” that will reinvest distributions in new funds and direct deals. The IPO marked the birth of yet another pool of permanent capital targeting the private equity market.

The underlying fund interests of Conversus are the former property of Bank of America division Bank of America Capital. Like many other financial institutions, Bank of America was eager to lighten the private equity load from its balance sheet. The bank sold this particular multi-vintage-year portfolio to Conversus for approximately $1.925 billion (€1.4 billion).

The Euronext offering, which raised $400 million, was only part of the picture. Roughly $225 million of Conversus' Guernsey units were placed with Bank of America Capital and Oak Hill Investment Management, the two groups that jointly will manage Conversus. A whopping $750 million went to two major limited partners – the California Public Employees Retirement System and Harvard Management Company. The remaining $400 million was sold to “certain directed investors”, according to a statement from Conversus.

Additional borrowings to transfer the fund interests from Bank of America to Conversus came from debt as a result of a collateralized fund obligation (CFO) programme, according to the release. Such a structured product approach has been used previously to package institutional portfolios of fund interests for sale. Essentially, these CFOs rely on technology developed to structure bonds and other debt instruments.

The earlier part of this decade saw a wave of private equity funds being used as collateral for fund obligation structures. In 2001, the Prime Edge deal became the first time securitised private equity funds were rated by a rating agency. In 2002, AON securitised approximately $450 million worth of private equity fund interests. The next year AIG created a roughly $1 billion collateralised fund and sold $250 million of the senior tranches to outside investors.

FRIENDS OF CONVER:SUSUnderlying fund interests in the offering