Spin-out firms are high on LPs’ wish list

LPs turn to first-time funds of spin-out firms as the strong fundraising market is making it harder for them to commit to the best-quality GPs, according to a survey by Sixpoint Partners.

It may be hard for a first-time fund to attract commitments from limited partners, but when a first-time fund is being raised by a spin-out firm, LPs are all ears, according to a recent Sixpoint Partners survey.

Almost all, or 98 percent, of the 60 institutional investors that Sixpoint polled in January said they would consider investing in a first-time fund in 2016.

Of that total, 45 percent of surveyed LPs, which include funds of funds, public pensions, family offices, endowments and secondaries firms, indicated they are either interested or very interested in first-time funds.

As opposed to first-time managers, spin-out managers have a proven track record and a valid history of investing in a specific strategy. They present attractive investment opportunities at a time when it has become increasingly difficult to commit to the best quality general partners due to a strong fundraising market.

“These spin-out GPs are really doing the same thing they’ve been doing for years,” said Eric Zoller, co-founder and partner at Sixpoint.

Zoller noted that GPs are increasingly spinning out of established firms for several reasons, including aging founders. “A lot of GPs are going through succession issues right now,” Zoller said. 

 
Some investing teams also feel they have been left out as their larger parent firms have diversified investment strategies. Sixpoint expects that trend to continue in the next 12 months.

Some private equity firms, whether spin-out GPs or established ones, are finding new alternative fund structures to lure LPs, such as including co-investing.

The ability to co-invest with a general partner is the strongest incentive to commit to that GP’s fund, according to 33 percent of LPs surveyed. It is followed by providing discounted management fees or carry, cited by 25 percent.

Zoller also mentioned some new structures where an insurance company provides captive capital to a GP they are looking to support.

The survey also confirmed LPs’ interest in distressed debt and turnaround strategies. The surveyed LPs said they intend to focus largely on buyout and growth equity strategies in 2016, at 86 percent and 80 percent respectively, but 61 percent of them also mentioned distressed debt and turnaround managers as strategies they plan on follow in the next 12 months.

“There’s a rising sense of the tension in the market and LPs are getting more defensive right now,” said Zoller, attributing rising volatility to problems in the energy sector, in China, and to a certain extent, to the manufacturing slowdown in the US.
 
Sixpoint is a global investment bank focused on the mid-market.