Avista offers ‘hybrid’ carry model on Fund III

The firm, which spun out of Credit Suisse First Boston in 2005, is targeting $2bn for its third fund for which it is charging a 1.75% management fee and sharing 100% of portfolio company fees with the fund.

Avista Capital Partners' third fund includes a distribution model that pays back limited partners all contributed capital for realised investments, including permanent write-downs, and all fund expenses, plus an 8 percent preferred return, before the general partner starts to collect carried interest.

GPs have been creative with structuring various terms and conditions to attract investors into new funds in the challenging fundraising environment. One term that LPs generally like is the “European” style waterfall distribution model, in which GPs only start to collect carry after LPs are paid back all contributed capital plus a preferred return.

Generally, US-based GPs collect carried interest on a deal-by-deal basis. Avista has established a hybrid version of the distribution model that touches on both styles – GPs will collect carry on a deal-by-deal basis but only after LPs are paid back the capital they contributed into the transactions, plus fund expenses and a preferred return, according to documents from the Oregon Public Employees Retirement System. The firm’s prior fund used a traditional deal-by-deal distribution model.

Avista declined to comment.

Avista is targeting $2 billion for the fund, which launched last year. Fund III will charge a 1.75 percent management fee on aggregate commitments until the end of the five year commitment period or the operation of a successor fund, according to the Oregon retirement system.

The firm also will offset the management fee using 100 percent of net portfolio company fees, the documents said.

Oregon’s pension documents give an unusually transparent view into terms Avista is offering its LPs and past fund performance. Avista’s second fund, which collected $1.8 billion in 2010, was generating a net internal rate of return of 21.4 percent and a net total value multiple of 1.33x as of 31 March, 2012. Oregon committed $100 million to Fund II and recently approved a $100 million re-up in Fund III.

Fund I was generating an 8.1 percent IRR and a net total value multiple of 1.31x as of 31 March, the system said in documents.

Earlier this year, Avista agreed to sell biopharmaceutical testing company BioReliance to Nasdaq-listed Sigma-Aldrich for $350 million. The firm bought a majority stake in the company in 2007 for $210 million.

Avista was founded in 2005 as a spinout from Credit Suisse First Boston. LPs in prior funds included the New York City Employees’ Retirement System, the North Carolina State Treasury and the Teachers’ Retirement System of New York City.