Andrew Hawkins doesn’t really like being called a ‘zombie hunter’. But the term is hard to avoid for managers targeting investments in end-of-life funds. At the beginning of the year, Hawkins officially launched NewGlobe Capital Partners, which is entirely focused on ‘disrupted-cycle private equity funds’, as Hawkins euphemistically likes to call them.
The problem is now well-attested. Various LP surveys have attested to investors’ concern about being lumbered with zombie funds, and the value of current assets in these vehicles has been pegged at more than $75 billion, which is, as Hawkins says, “a very sizeable chunk of assets to go after”.
However, NewGlobe hopes to provide a very specialist solution. It describes itself as an “LP secondary firm with a special twist”, with an approach that is “beneficial for everybody [involved]”, according to Hawkins.
Essentially, it provides liquidity options to LPs and offers a partnership to the incumbent GP. NewGlobe offers to buy out all LPs in the fund via “some kind of tender offer”; it then either gives them cash, or rolls their interest into a newly-established vehicle.
As part of this process, New Globe becomes an “influential co-GP”, either at investment committee level or on the GP’s board, and shares the economics with the existent manager. Their working relationship is key, according to Hawkins – because the GPs know the management teams and have the relationships with the portfolio companies.
This resolves the main problem with end-of-life funds, says Hawkins: unmotivated GPs. “An economically rational GP who realises that his fund is underwater and will never pay carry, and who knows he is never going to raise another fund is hugely incentivised not to sell assets – since all that will happen is that he will lose his fee stream,” he says.
While the underlying assets are often good, the value has gone down because of distressed ownership and capital starvation, he adds. So merely by buying up these assets, the value increases immediately. “There’s a combination: you have decent assets, with an un-incentivised manager becoming incentivised. [And] you are buying assets at a discount because of the fact that they are illiquid.”
While NewGlobe claims to be the first firm completely devoted to investments in ‘end-of-life-funds’, the model itself is not new. Last September, CPPIB set up a new vehicle for five portfolio companies from Behrman Capital’s Fund III, which was raised in 2000. A month earlier, Vision Capital, Landmark Partners and PineBridge Investments created a new fund for three remaining portfolio companies from Willis Stein & Partners Fund III, a 2001 vintage.
Hawkins, at the time still vice chairman of Vision’s advisory board, was involved in this deal – as were his colleagues Christophe Browne and Ricardo Lombardi, both now partners at NewGlobe.
New Globe, which is backed by investment manager Hamilton Lane, aims to deploy at least $500 million a year. Hamilton Lane will provide the capital for NewGlobe transactions, while New York-based GP Vanterra Capital will provide financial, strategic and operational support to the firm and invest alongside Hamilton Lane.
So far, the firm has had positive feedback from both GPs and LPs in the market, according to Hawkins. “Investors know that misalignment in disrupted cycle funds is a growing problem, so NewGlobe provides a catalyst for new ownership and liquidity in difficult situations,” he says.