Lexington Partners, the US-headquartered secondaries firm, has closed Lexington Capital Partners V, the firm’s fifth fund, on $2bn, marking the end of a lengthy, but ultimately successful, fundraising process.
Lexington began fundraising for the fund in late 2001 with a proposed target of $2.5bn. However this was revised to $2bn at the end of 2002. “We soon realised that discounts in the secondaries market made a $2.5bn target unnecessary so we decided to cut the fund to $2bn,” said Lexington partner Marshall Parke. “The fundraising ended up oversubscribed.”
Lexington has yet to publish details of the limited partners of fund V, although it has been disclosed that 30 per cent of the fund’s capital originated from outside the US, with LPs coming from Europe, the Middle East and Japan. A number of limited partners, including the New York State Teachers’ Retirement System and the Canadian Pension Plan Investment Board, had earlier confirmed that they were planning to invest in the fund.
LCP V will invest in mezzanine, buyouts and venture positions across the US and Europe, with a small allocation set aside for emerging markets. Up to ten per cent of the fund’s capital will also be designated for primary investments.
Parke, who headed the fundraising process outside the US and who has relocated to the firm’s London offices, said he is bullish about prospects in the secondaries market, despite some market practitioners voicing doubts as to whether secondary funds will be able to as successfully deploy the amount of capital now raised as they used to.
“Secondaries used to be a niche business where a small group of firms could execute some neat deals,” commented one adviser, 'You now have more players with more money chasing the same deals so it's going to be tougher to execute home-run investments.” Parke though sees the whole market growing sufficiently to accommodate these additional firms and funds. “According to our own data, there was $1.8bn invested in secondaries in 2002. In the first half of 2003, the value of deals completed or close to completion had reached $4bn. This is likely to hit $6bn by the end of the year. We expect to see further growth next year.”
Lexington has already committed around E550m, 27 per cent of the fund V total, with Parke confident that more deals will follow in the second half of the year. As is the case with the large majority of secondary transactions, Lexington has not disclosed any details of completed let alone imminent investments, although he confirmed that banks, insurance companies and to a lesser extent pension funds remain the biggest sellers.
2003 witnessed the largest disclosed transaction in the secondaries sector when DB Capital’s Ted Virtue and Graham Clempson finalised the E1.5bn purchase of a secondary private equity portfolio from Deutsche Bank, backed by a consortium of investors including NIB Capital, Coller and HarbourVest Partners.
The $2bn total makes LCP V the second largest dedicated secondary fund raised. Last year, UK-based Coller Capital closed Coller International Partners IV Fund, a global secondaries fund, at $2.5bn. It was this fund that encouraged speculation that secondary investing was becoming over-popular amongst investors looking to exploit other investors' wish to reduce or exit their private equity commitments. Lexington Capital Partners V is by far the largest fund raised by Lexington, exceeding the previous largest – LCP II – that raised $1.1bn and which specialised in buyout secondaries. The firm’s most recent fund, LCP IV, closed on $606m in 2001.