Meteor5’s innovative vehicle to back emerging private equity managers has such high expectations for its returns that the preferred return hurdle is set at 20 percent.
The fund, which is targeting $125 million, will charge a 2 percent management fee and, once the considerable hurdle is met, will split the returns two-thirds to the investors and one-third to the Meteor5 team, according to a confidential investor document seen by Private Equity International.
Meteor5, set up by four members of placement agent MVision Private Equity Advisors and a veteran Spanish private equity professional, seeks to plug the funding gap for new management teams in private equity.
The way it works is this: Meteor5 provides between $8 million and $12 million to new groups to fund all their financing needs through the closing of their fund, such as start-up costs, rents and employee compensation. In exchange, Meteor5 takes between 10 percent and 20 percent of both the management fee and the carried interest on the firm’s first two or three funds, depending on the agreement.
The investor documents show the vehicle will have a longer life – 17 years – to allow for each managers’ two or three funds to be raised and harvested. The fund intends to back 10 to 14 new firms, all of which are expected to be employing a “2-and-20” management fee and carried interest model.
Case studies and modelling in the investor documents imply management fees alone will generate a distributions to paid-in (DPI) multiple for Meteor5 of 2.3x, and a 2x DPI for the underlying funds would bump that up to an eye-popping 5.7x.
The managing partners of Meteor5 are Loren Boston and Javier Loziaga. Boston is a seasoned private equity professional whose career history includes being president and chief operating officer of investment bank Hycroft, global head of origination in Merrill Lynch’s private equity funds group and head of Citigroup Global Markets’ private equity fund group. Javier Loizaga is the former chairman of Spanish private equity firm Mercapital and current chairman of MOIRA Capital Partners.
Not equity, but ‘equity-like’
While Boston declined to comment on the fundraising, or the vehicle’s potential terms and conditions, he shared with PEI some of the rationale behind setting up the firm and the way its strategy will operate.
Boston explains that a Meteor5 investment is “equity-like” in that there’s money at risk – if a management team it backs does not get its first fund raised, it’s a complete loss for Meteor5 – but unlike a traditional private equity fund, the investment is self-amortising, and “substantially de-risked” once the fund is raised.
For investment professionals looking to strike out on their own, the capital is designed to reduce the financial burden of leaving a comfortable spot in an established firm – which may require leaving some carry on the table.
“There are a lot of people who don’t need this financing. Maybe they’ve been paid out over a number of funds and they’re wealthy at this point,” Boston said.
“But the private equity market’s a very large market, and a lot of up-and-coming leaders in the market haven’t accumulated enough liquid net worth to be without a sizeable income and to hire a team.” This is partly driven by an increase in the US in the use of the European-style, or whole fund, carry waterfall, in which investment professionals may need to wait as long as 15 years to receive full carry.
The amount Meteor5 will invest will depend on the financing needs of the individual management team. A key benefit for these teams will be the ability to build out their teams up front, Boston said.
“If you go out to raise a new fund and you have two people and you say to investors, ‘Well, once we get our fund raised we will add eight more people’, a lot of LPs will say ‘That’s very interesting, great, come back to me when you can identify all the members of your team’,” he said.
“You’re going to want to hire all the key people that are responsible for the track record you’re using to raise your capital.”
Commitments within commitments
While Meteor5 will have an agreement with each firm as to how they will use the money invested with them, the relationship will be arms-length; Meteor5 will not be part of the investment team or the management committee.
The fund is seeking to back “the future leaders in private equity”; the groups must have a good track record and strong references such that they can support a debut fundraise of $300 million or more.
When Meteor5 backs a manager, it will also negotiate the opportunity for its investors to commit co-investment capital into each new manager’s fund, should they choose to do so. In addition, when possible, Meteor5 investors will also have co-investment rights in individual deals of the managers it backs.
“This is a tremendous opportunity for groups that want to commit larger sums of money to new emerging managers,” Boston said.
“It gives strategic investors the opportunity to put a lot more money to work than if they were just waiting to see a new fund once it’s in the market, because they’ll have the preemptive right to be able to make those investments earlier on, before a fund is launched.”
And there are plenty of these investors around. One of the reasons Meteor5 is concentrating its efforts in the US – beyond the maturity of the market leading to a higher velocity of spinouts – is the strength of emerging manager programmes at large limited partners.
“The Meteor5 team is aware of at least 30 very large LPs in the United States today that have set up emerging manager programmes, and they’re primarily focused on US management teams,” Boston said.
“So, if we have a very, very good team we’re bringing to market, we’ve got a ready-made group of investors who we know will take a look at it, and if the managers we back are of the calibre we expect, they’re very likely to be a cornerstone investor.”
Investors with such programmes include the California Public Employees’ Retirement System, Employees Retirement System of Texas, Los Angeles County Employees Retirement System, the University of California and Chicago Teachers’ Pension Fund.
Joining Boston and Loziaga are MVision co-founder and PEI Rainmaker Mounir Guen, MVision founding partner Hussein Khalifa and managing director Dennis Kwan. Before co-founding MVision in 2001, Khalifa was founding director and chief executive of UK corporate finance advisory boutique Archstone Capital. Kwan, who joined MVision in 2014, co-managed the private equity and infrastructure funds investments programme at Sumitomo Mitsui Trust in Hong Kong.
The firm also has a managing director, Sebastián Cerezo, a partner at MOIRA. Both Loizaga and Cerezo are based in Madrid. Additional hires are in the works.
The decision to bring in a partner and managing director from outside the MVision family was deliberate, Boston said, signaling to potential investors that the team not only has expertise in raising money but in managing a private equity firm and portfolio companies.
The five partners are making a substantial GP commitment to the fund, according to a source with knowledge of the fundraise.
Boston declined to comment on the GP commitment.
Boston underscores that Meteor5 is a standalone business with its own fiduciary responsibility, with all transactions between it and MVision on an arms-length basis. However, the relationship between the two firms should bring mutual benefits.
“MVision is providing some services of value to Meteor5, and in exchange for that Meteor5 has given MVision a right of first consideration on fundraising for the funds we’re backing,” Boston explains, adding that if another placement agent were to approach Meteor5 for an investment, the firm would make an independent decision on whether to invest and respect the prior relationship.
“Meteor5 will get no economics as a result of the fundraising being done by MVision. However, the affiliation with MVision substantially ‘de-risks’ the greatest risk new management teams face: fundraising risk.”
The strong fundraising environment of the last few years has been an encouragement to groups looking to spin out.
According to data from Pitchbook, 13 different US firms closed debut funds during the first half of 2018, gathering a combined $3.5 billion. This puts the year on track to equal last year’s total in terms of number and exceed it in terms of dollar value. If that pace is maintained, the $7 billion raised for first-time funds would be the second-highest annual total of the past seven years.
Globally, 97 debut funds closed in 2017 raising a combined $19.89 billion, and as of 29 August, 46 debut funds had closed on a combined $9.66 billion, according to PEI data.
Of course, as Pitchbook notes, there’s a time lag in how managers react to the market; funds closing this year have most likely been on the road for at least a year.
But even in less buoyant times, there will always be managers looking to strike out on their own, and as times get tougher, seed capital and fund placement expertise will only get more appealing.