Oregon commits to ultra LP-friendly fund

Public Pension Capital, launched by two former KKR executives, is offering ILPA-like terms on its debut fund, including giving LPs authority over the budget-based management fee.

This might be the most LP-friendly fund yet.

One of the terms offered by Public Pension Capital Management, which is raising its debut vehicle, is the creation of an advisory board with the power to set the fund's management fee based on an annual operating budget that it also agrees.

Two former Kohlberg Kravis Roberts executives, Perry Golkin and Michael Tokarz, formed Public Pension Capital, which is targeting $500 million for its debut vehicle. The firm only wants five limited partners in the fund, who will contribute $100 million each and serve on an advisory board.

The fund will have an “evergreen” structure and a first close is scheduled for 31 March, 2013. It comes with a three-year lock-up, after which time, on every 31 March, LPs can elect to cancel their undrawn commitments. LPs who

Michael
Tokarz

choose to cancel uncalled commitments would receive distributions as realisations occur on their invested capital, according to documents from Oregon’s state pension system’s investment staff. Oregon Investment Council approved a $100 million commitment to the fund, with certain conditions, recently.

The advisory board will have “substantially enhanced governance rights”, including the authority to terminate and replace the chief executive, Golkin; set and approve the operating budget for budgeted management fee purposes; approve potential new investors to the fund and approve additional members of the board.

Fees also will be lower than the market average, though the fee levels were not clear as of press time. The management fee will scale down as the size of the fund increase, the Oregon documents said. The management fee must also be paid back before the GP starts to collect carried interest. All transaction and other fees will be used to offset the management fee.

Staff views this model and proposed structure as innovative, and a highly attractive business model, which provides benefits to both [the firm] and investors.

As far as performance fees for the GP, carried interest will be 5 percent for an annually compounded rate of return between 4 percent and 8 percent. Anything over an 8 percent return will boost carry to 10 percent, the documents said.

“Staff views this model and proposed structure as innovative, and a highly attractive business model, which provides benefits to both [the firm] and investors,” Oregon investment staff wrote in a board memo. “LPs would receive very attractive economic terms, greatly enhanced governance rights and better alignment of interests with both [the firm] and fellow investors.”

The firm will pursue a generalist strategy, though with a focus on six areas: financial services, energy, speciality chemicals, consumer, industrial and healthcare.

Tokarz left KKR in 2002 and took over leadership of MVC Capital, shifting its strategy to focus in on smaller private equity and mezzanine deals, according to Oregon. Seven professionals from MVC will join Public Pension Capital, the documents said.

Firms have been exploring innovative ways to entice investors into their funds; The Carlyle Group, for example, offered LPs in its sixth global buyout fund a way to quickly liquidate their fund interests, lining up five secondary firms to be preferred buyers of stakes an LP wants to sell, and pricing interests twice a year.

On the other hand, LPs have been pressuring GPs to tighten their interests with investors in funds, lowering fees and tying the management fee closer to the operating budget of the firm. The time seems just right for a structure like Public Pension Capital, but it remains to be seen if the firm can convince LPs to trust it with their capital.