In February, Park Hill Group hired former Coller Capital executive Andrew Caspersen to focus on helping GPs restructure private equity funds that are at or approaching the end of their lives.
The hire wasn’t just big news for the firm; it also underscored a broader trend in the market of firms beefing up their fund restructuring capabilities.
More and more general partners have ageing funds that fall into this category – and this has created a large and growing opportunity. Fund of funds Pantheon estimates there are 250 funds that are at least 10 years old, with at least $100 million of net asset value remaining. All told, it reckons there could be up to $100 billion of overall net asset value in these end-of-life funds.
“There are a lot of funds and a lot of capital tied up in older vintages that are approaching the end of their lives or running through their extensions,” Caspersen tells Private Equity International. “They’re outliving their intended period and their LPs are looking for distributions as well as [to lower] their administrative burden, [so they’re] eager to wind those funds down.”
Park Hill, the placement agency and secondaries broker affiliate of The Blackstone Group, is not alone in dedicating resources to the strategy; most firms in this area have individuals or teams that explore potential fund restructurings.
Two deals last year outlined ways in which secondary firms could help restructure older funds. Landmark Partners, Vision Capital and PineBridge Investments helped structure a new fund to house three remaining portfolio companies from Willis Stein & Partners’ 2001 vintage third fund. And CPPIB anchored a deal that involved the formation of a new vehicle to house five portfolio companies from Behrman Capital’s 2000 vintage third fund.
These are not easy deals to do. LP cooperation is the key to success, and in both of those deals, some LPs expressed frustration at various aspects of the arrangements.
Of course, investors’ hands are usually tied – if they force the manager to liquidate the fund, they either lose assets at fire sale prices or end up with a bunch of shares in private companies that they don’t really want. And their only other option is to negotiate with the manager over continued payment of management fees, or maybe even lowering the bar on preferred returns so that the manager still has a chance of hitting carried interest.
In these situations, a restructuring offers genuine hope of a way out. But finding consensus among frustrated investors who are out of patience with the GP in question is never easy.
The prospective secondary firm partner in a restructuring has to go in with eyes wide open, says Jason Gull, partner with fund of funds Adam Street Partners. “Often, but not always, there can be improprieties between the GP and the LP in the context of this restructuring – where the GP is looking to maintain a fee stream and business that would otherwise go away. In order to do so, they can be at odds with their existing LPs.”
Specialists who can consistently solve problems like this may be able to build a very lucrative line of business in the coming years.