TA Associates is raising up to $1 billion to take minority stakes in certain portfolio companies its main fund is selling as a way to hold those investments longer, according to two sources and the firm’s regulatory filings.
Through the strategy, the firm will be able to deliver liquidity back to the main fund, and retain investments it believes still have growth potential. The strategy is unusual (and a first for TA), but part of a broader trend of firms finding ways to increase hold periods on strong investments with more room to grow, sources told sister title Buyouts.
“This is [providing the firm] the ability to … continue to play in those assets where they think having longer hold periods is beneficial but at the same time taking capital off the table,” one of the sources, an LP who has heard the fund pitch, said.
The fund, TA Select Opportunities Fund, is in market now. It’s not clear how much the fund has raised so far. TA closed its largest fund to date, TA XIII, on $8.5 billion earlier this year after only a few months on the market.
Select Opportunities Fund is capped at $1 billion. It will not charge LPs a management fee, but will collect fees from portfolio companies, according to one of the sources and the Form ADV. The fund will charge a 20 percent rate of carried interest, one of the sources said.
Boston-based TA describes the Select Opportunities Fund as a “best ideas” fund that will invest in TA portfolio companies that have met or exceeded TA’s target returns, but still have compelling future growth, according to the Form ADV.
Target investments will involve TA portfolio companies held by the firm’s main equity fund that are being sold to third-party investors. In such deals, TA’s main fund would likely retain a minority stake, with the Select Opportunities Fund co-investing in the company alongside the third-party investor, the two sources explained.
“[TA is] doubling down on the company with a new buyer,” one of the sources said. What they have recognised is that “some of their companies are really good, and someone else pays a big price for them, and with some of the companies, the new buyer makes a lot of money on it as well”.
The strategy comes with risks, as TA outlines in the Form ADV, including the challenge of generating high returns on companies that have comparatively higher enterprise values than those that the main fund targets. “The possibility of generating breakout returns is less likely,” according to the Form ADV.
Other risks include potential conflicts of interest with third-party investors that already have a relationship with TA through prior investments; a potentially limited number of opportunities, especially considering each deal would require a third-party lead investor; and TA’s reduced influence on the investments as a minority investor.
“Due to its minority position, the SOF Funds may have no right to exert significant influence, including having less influence to mandate initiatives to drive growth in any portfolio company, or protect its position in such portfolio companies,” according to the Form ADV.
Caroline Collins, a spokeswoman for TA, did not return a request for comment.