London-based GMT Communications is set to complete a major restructuring of its €365 million 2000 fund this week, PEI has learnt – making it one of the few successful private equity fund restructurings in Europe to date.
GMT, which invests in European companies in the communications space, attracted two secondaries players – understood to be Lexington Partners and Newbury Partners – to give the fund a new lease of life.
The firm’s Fund II ran into difficulty during the economic downturn when it struggled to sell some of the remaining assets before the end of the fund’s life. It also became clear that the fund, which had a deal-by-deal carry structure, would have to repay some of the proceeds back to investors – a process known as claw-back – because it wouldn’t meet its hurdle rate.
As part of the deal, which is due to close this week, GMT offered three options to its LPs: to sell up, roll over into a new fund, or maintain the status quo. Approximately 75 percent of LPs agreed to sell their stakes, while 25 percent opted to roll over into the new fund, the firm’s managing partners Timothy Green and Jeffrey Montgomery told Private Equity International. Giving LP options rather than forcing them down a particular route was key to the success of the deal, they said.
GMT declined to comment on how much Lexington and Newbury paid for the fund stakes, but it is understood the overall price was approximately 90 percent of NAV including claw-back amounts. To the investors who chose liquidity, the secondaries deal meant GMT was able to deliver a positive return for the fund as a whole. “This means investors [in the 2000 fund] haven’t lost money,” Green said. “It’s not a return to write home about, but it is a return and that’s something we are relatively happy about.” Returning capital on a vintage year 2000 TMT fund is however something only three funds worldwide (including GMT's Fund II) have managed to achieve, Montgomery added.
Lexington declined to comment while Newbury could not be reached for comment at press time.
GMT’s biggest challenge, he added, was to settle the claw-back liability, which included both existing and former GMT partners and employees. “While it was clearly defined in their contracts, the reality is that people don’t expect that call. It took a long time, but in the end we managed to get all carry holders to participate,” he added.
GMT declined to comment on how much it repaid, but a source close to the deal said it was more than €10 million.
The firm started to contemplate a restructuring in late 2012, after GMT had been given two fund extensions – during which time the firm offered to waive management fees on the vehicle. It hired Park Hill Group to manage the process last October.
GMT now has three years plus two possible one-year extensions to divest the three remaining assets in Fund II. The firm declined to comment on the specific economics of the new fund.
While the 2000 fund didn’t deliver the return GMT had anticipated, its 2006 fund, a €342 million vehicle, is performing much better, Green said. “We have already returned 70 percent of the capital from that fund. The overall performance is top-quartile for that vintage year, based on EVCA methodology.”
Following the restructuring, GMT plans to return to market in the second half of this year. It started pre-marketing last year to raise between €300 million and €350 million for its successor fund, before realising it first needed to address the issues with its 2000 fund.