Clearlake’s flagship vehicles invest across the capital structure in debt and equity securities. The firm is seeking to generate 25 percent-plus gross returns for targeted investments over typical hold periods of three to five years, according to pension fund documents from the Pennsylvania Public Schools Employees’ Retirement System, which committed $200 million to the fund.
In conjunction with the fund close, the firm established the Clearlake Foundation, which will “benefit from a fixed portion of Clearlake’s fees from this fund”, the firm said in a statement.
We caught up with co-founder and managing partner José Feliciano to find out how the drastic shift in market conditions affected the fundraise and the plans for investing the fund.
Was fundraising affected by travel restrictions resulting from covid-19?
We were fortunate that we launched the fund in late fall last year, so we were able to essentially have all the in-person meetings done ahead of time, including on-sites. We also benefited from a very high re-up rate, in the 95 percent-plus range. The support from existing investors coupled with several new relationships was the recipe for a successful fundraise.
We were also trying to be sensitive to the fact that we are all going through a very difficult environment, and we did give our LPs more time, at the end, to be able to process the documents, side letters, etc. We felt it was important to be sensitive to that, even though we may have had the ability to close sooner.
This fund is almost twice the size of its predecessor, and in the short time it took to raise the vehicle the market environment has changed dramatically. What kinds of opportunities are you looking at right now?
Whereas many traditional private equity firms are locked out of the market, not able to execute on their traditional playbook of buying a company with leverage, making modest improvements, and then selling it, we not only improve on that traditional PE playbook but we can also take advantage of dislocations like this one, as evidenced by the fact that we have deployed over $1.3 billion of capital over the past five or six weeks.
We activated the fund at the beginning of March. Even in the more benign economic environment we were living in until February, we always kept a very significant focus on the secondary market: how can we take advantage of any opportunities that may arise there? We were expecting more idiosyncratic opportunities, meaning that one or two companies out of the 50 to 75 we were tracking could potentially have a bad quarter or two. What happened next was much more of a macro dislocation. We basically completely shifted our focus. We were ready.
Today, we have a daily ‘war room’ type of investment committee video conference call. We’re tracking over 200 opportunities in the secondary market, and we have already started accumulations in over 20 of those companies. They tend to be primarily secondary credit opportunities, although we wouldn’t rule out equity as well as part of our accumulations.
Most of these target investments are companies in our core sectors, technology and industrials, and consumer, that we have been tracking for a long time. These may have been companies that we knew from a past life or we had looked at, maybe potential add-on acquisitions we had evaluated in the past, so we were well-positioned to react quickly to this environment.
In the next several months and quarters, we’ll continue to focus on the individual performance of these companies, and we fully expect there may be opportunities to deploy more capital in these initial opportunities. We also expect a transition to more liquidity-driven, solution-driven financings. It could be rescue financings or even financings for very healthy companies that for whatever reason need more liquidity, maybe to enact a part of their business plan or to do an add an acquisition, and would benefit from Clearlake’s sponsorship and knowhow.
Clearlake invests across the capital structure. What are you expecting the mix of assets for this fund to look like, compared with its predecessors?
I would expect a larger part of this fund will be devoted to secondary market stressed and distressed opportunities, as well as more special situations in general. Having said that, the fund is going to be investing for the next six years, and we do expect at some point there’ll be a recovery in the capital markets and the underlying economy, so we’ll eventually start to see buyouts come back. After each of the past three recessions, we have seen valuations come down some, and those have tended to be great vintages to deploy capital, to buy businesses and make those companies better. We’re very focused not only on buying these companies at attractive valuations and hopefully helping them transition through this very difficult economic environment, but we are fundamentally driven by trying to make these companies better. So we will be ready for that next phase.
How is the current portfolio coping with the economic effects of the pandemic?
We had been selling more than we had been buying over the past few years. Secondly, we largely avoided the hardest hit segments: we basically had zero exposure to hospitality, gaming, retail, restaurants, very little exposure to energy, so we were well positioned for the downturn.
We’re extremely focused on the portfolio. We’re trying to apply best practices across that portfolio. It’s back to basics – monitoring liquidity, identifying opportunities to reduce costs, instituting hiring freezes, finding new customers or new applications for our products. We have been very quick to roll out those initiatives, which has bolstered our confidence in our own portfolio and positioned us to play offense, to look for new opportunities, and to allow our companies to look for add-on opportunities, for example, buying weaker competitors. Overall our companies are well positioned with adequate liquidity and no immediate financial triggers. For example, across the entire portfolio, we only have two or three companies that may have maintenance covenants. So again, we’re in a great position to weather the storm.
Having said that, we’re not immune to what’s going on in our society; there’s a lot of pain and suffering out there, and our companies, employees, customers and clients are definitely experiencing that. We do expect, at the very least, a significant temporary economic slowdown, particularly in the second quarter, and we do expect that the growth we were seeing across our portfolio will slow down for the next several quarters.