(PrivateEquityCentral.net) Two major investing institutions, DB Capital and Lazard Alternative Asset Advisors, have different reasons for pursuing securitisations of their private equity programs, but the deals represent two vastly different approaches to this nascent liquidity solution.
Deutsche Bank is about to come to market with a “collateralised fund obligation” backed by 77 partnership interests housed in DB Capital, the bank’s private investment arm, according to a source familiar with the matter. A collateralised fund obligation, or CFO, securitises underlying funds and issues new securities with varying levels of risk.
Deutsche Bank’s private equity CFO will include Standard & Poor-rated bonds, which will be sold, as well as a risky equity tranche, which will be retained by Deutsche Bank. Published reports put the value of Deutsche Bank’s CFO at $690m, although one source put the bank’s goal at $1bn.
While Deutsche Bank’s goal is to take some private equity exposure off its balance sheet, Lazard’s securitisation effort is designed to raise capital for additional investment. According to several sources, the firm is in the market with a $1.2bn vehicle structured as a 2 per cent redeemable participating preferred stock. This means it guarantees an IRR of at least 2 per cent. The underlying funds will be made up of 75 per cent Lazard funds including distressed, venture and private equity products and 25 per cent third-party funds. The management fees and carry are already factored into the cost structure. Lazard is guaranteeing the fund’s coupon through an insurance wrap provided by Berkshire Hathaway, the insurance holding company founded by Warren Buffet, the world’s second wealthiest man and a star investor.
The Lazard vehicle includes one particularly optimistic feature: if at the end of its 12-year life it has returned three times principle, Lazard takes a 10 per cent carry. “This is a neat way for Lazard to raise money for its private equity and merchant banking activities,” said an investor who was sent offering documents.
Lazard is not the first to attempt this securitisation approach. Deutsche Bank already came to market with a principal-protected, $300m vehicle called DB Protector, an XL Insurance-wrapped fund-of-funds with a Standard & Poor’s rating. Half of the vehicle’s underlying funds were to come from Deutsche Bank’s inventory, with the balance made up of new partnerships into 2004. The same source also says DB Protector was “dead” as an ongoing effort.
Last year, a similar effort from J.P. Morgan, called the Porter fund, also failed to gather steam and was shelved.