It’s the nightmare scenario for LPs: being stuck in a ‘zombie’ fund that’s fast approaching the end of its life-cycle with a portfolio full of unrealised assets and an unmotivated manager. Either the GP is unable to sell the assets for a good price – or they’re reluctant to do so because they’re reliant on the management fee for income.
It’s an increasingly common problem. In a 2011 Coller Capital survey, about half of LP respondents said they had zombie funds in their portfolios. In January last year, NewGlobe Capital, a secondaries adviser, estimated the market for end-of-life funds to be worth more than $75 billion across the US and Europe.
Admittedly a lot of these processes tend to fly well below the radar. But in Europe particularly, the market has developed rather more slowly than expected.
“In Europe, it has been a little slower than in the US market, where we [have] started to see a number of these type of transactions,” says Andrew Sealey, managing partner and chief executive officer at Campbell Lutyens. Yet he believes a large number of these restructurings are still to come, “especially once the larger 2005, 2006, 2007 funds approach or get to their ten-year anniversary”.
However, the recent restructuring of Motion Equity Partners shows just how lengthy and complex these transactions can be. The firm had been under pressure ever since its restructuring in 2011 (when former partner Nigel McConnell left the business), while the negotiations with HarbourVest specifically apparently took around six months.
The agreement reached is that HarbourVest will provide the firm with capital to do a few deals, while giving it about four years to make money from its portfolio, according to two sources familiar with the matter.
It is understood that investors in Motion’s Fund II, a €1.25 billion vehicle raised in 2005, had the option of either selling their stakes or remaining invested in the fund. Approximately half decided to sell, the source said – including the Nationwide Private Equity Fund, AlpInvest Partners, BNP Paribas, City of Zurich Pension Fund, Goldman Sachs Private Equity Partners 2004 Employee Fund, Scottish Widows Investment Partnership, BlackRock Private Equity Partners III, according to a filing with the London Gazette. It’s unclear how much HarbourVest paid for the LP stakes.
Terms for the remaining investors will stay the same, which means LPs continue to pay management fees – albeit at a reduced rate, since they’d already been cut in Motion’s 2011 restructuring. In fact, ensuring the terms remained unchanged was precisely why HarbourVest managed to close the deal, sources say. Motion had previously been in talks with Canada Pension Plan Investment Board; the latter wanted to restructure the fund and force LPs into a new vehicle, which they wouldn’t agree to.
Both HarbourVest and Rede Partners – which is understood to have advised on the transaction – declined to comment, while Motion didn’t respond to a request for comment at press time.
Still, the hope among secondaries specialists is that the Motion deal – by proving that these negotiations can succeed – will pave the way for other deals.
Sealey, for one, is convinced that more of these will happen – albeit perhaps not as many as some seem to expect.
“There are large numbers of GPs in the US and Europe that are unlikely to raise follow-on funds, [so] there is a potential requirement to do some restructurings. Unfortunately, it will probably not be quite as big or important as some secondary players and advisers currently hope.”