Behrman completes Fund III restructuring

Behrman Capital has completed a restructuring of its $1.2 billion third fund that cashes out limited partners who want to exit the fund for good, and creates a new vehicle to house five remaining portfolio companies.

Canada Pension Plan Investment Board anchored the restructuring, providing $654 million for the new fund. Goldman Sachs and other investors are providing additional capital to boost the fund’s total to about $1 billion, Behrman said in a statement Monday. Cogent Partners was financial advisor for the transaction.

The five companies in the new fund, called Behrman Capital PEP, are nursing home operator Ark Holding Company, manufacturing business ILC Holdings/DDC, manufacturer Pelican Products, lining material maker Selig Sealing Products and manufacturer ILC Dover. Investors in Behrman’s fourth fund also have stakes in Ark and Pelican.

Those companies will pay an exit fee of about $40 million as part of the restructuring, according to several sources with knowledge of the deal. Bloomberg first reported on the deal.

The exit fee, which some sources in the secondary market criticised, will be used mostly to pay LPs who are cashing out, according to a person with knowledge of the deal. About 97 percent of the total exit fee will go to LPs, the person said.

Behrman will be the sole manager of the new fund, which will charge a management fee to the new investors and pay out 20 percent carried interest. Behrman Capital PEP has a six year fund life. The fund will also have a small amount of capital for add-on investments.

It’s not clear what valuation was used to configure the LPs’ pay out, though Fund III had already made money for investors and was marked above par, according to two sources who described the fund as a good performer.

Behrman’s fund restructuring comes after another firm completed a restructuring of a long-lived fund. Willis Stein & Co. recently completed a restructuring of its third fund, a 2001 vintage that closed on $1.8 billion. In that situation, Landmark Partners, Vision Partners and Pinebridge Investments financed the creation of a vehicle to house three remaining portfolio companies from Fund III.

Behrman differed from the Willis Stein situation in that no existing Behrman LPs chose to roll over their fund interests into the new vehicle.

“Fund III was successful, and the five companies that were subject to the PEP transaction were amongst our best investments,” Grant Behrman, head of the firm, told Private Equity International. “I believe that obtaining liquidity toward the back end of a fund’s life through a secondary auction of a package of assets as opposed to individual M&A sales may well catch on in the industry.”

The Behrman and Willis Stein restructurings have been closely watched by the industry as examples of ways to allow LPs to exit funds that have lived beyond their contractual lives. The situation of funds that are well into their life extension periods and bumping up against the end of their lives is one that is consistently on the minds of LPs with older portfolios, who have to deal with managers asking for life extensions – and paying out management fees – on funds that have operated for a decade or longer.