General partners whose funds lack the reserves to make new or follow-on investments aren't the only ones considering the merits of annex funds backed by secondaries firms.
They are also being viewed as a solution by limited partners lacking liquidity or overweight in their private equity allocations, according to Rudy Scarpa, partner with Pantheon Ventures and head of its New York office.
“We provide them with capital and they use that capital to fund their capital calls or make new PE investments,” Scarpa recently told sister magazine Private Equity International. “In return we receive a preferred return on that capital, so we receive early distributions from their portfolio of private equity fund interests and we also get a minimum return.”
The economics are similar to a preferred annex structure, just applied in a different context, he added.
Given that 2009 and 2010 vintages are expected to out-perform, Scarpa reckons LPs will increasingly turn to such arrangements so as not to be left out of the market or lose traction on their relationships with important GPs.
Pantheon is not the only firm developing vehicles to aid institutional investors struggling with liquidity issues or the denominator effect.
In May, PEO revealed that Probitas Partners was quietly shopping a vehicle that matches cash-strapped LPs with counterparties eager to help fund future capital calls. The San Francisco-based private equity advisor has been fine-tuning the vehicle, called Prospective, since last year and has gone so far as to seek a patent for key aspects of the product.
Probitas did not immediately respond to a request for comment.