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Chicago’s Prospect inks first-time continuation fund

The deal closed the books on Prospect’s 2010-vintage Prospect Partners III, with almost all of its LPs opting to cash out, partner Erik Maurer tells Secondaries Investor.

Prospect Partners, a Chicago-headquartered mid-market firm, has completed a GP-led process to lift the remaining assets out of a 2010-vintage fund, Secondaries Investor has learned.

New 2nd Capital lead the creation of PP III Continuation Vehicle in December, according to a statement Secondaries Investor has seen exclusively. Adams Street Partners and Abbott Capital Management also participated. M2O Private Fund Advisors advised Prospect on the deal.

The process moved the seven remaining portfolio companies – one of which has since been exited – out of the $200 million Prospect Partners III. Fund III originally had 13 portfolio companies.

Though the deal size was not disclosed, a Form ADV filing dated 17 November put Fund III’s NAV at $123.6 million. The transaction was also understood to have included an unfunded commitment that could support future acquisitions.

Prospect was founded in 1998 and focuses on “pre-middle market” companies with $2 million to $8 million of EBITDA and $10 million to $75 million of revenue, according to its website.

“As many investors look for bigger transactions, we’ve stayed in our niche,” partner Erik Maurer told Secondaries Investor, noting that almost all of Fund III’s LPs took the liquidity option. “We keep doing these smaller deals, and the fit with our LPs just wasn’t as good as it as it was 20 plus years ago.”

New 2nd and the purchasing syndicate were attracted to the continuing opportunity “to professionalise lower middle market companies” over a longer time horizon, Maurer said.

Prospect’s ongoing leadership transition from firm founders Rick Tuttle and Lou Kenter to the next generation also contributed to the decision. “This was a good way to really make sure that we’ve got continuity” as the firm resets its economic and investment time horizon, Maurer added.

Diversified continuation deals such as Prospect’s can stand out to buyers against a deluge of single-asset deals, Quinn Kohlberg, a vice-president at M20 and one of Secondaries Investor’s Next Generation Leaders Class of 2021, said.

Multi- and single-asset continuation vehicles represented 84 percent of GP-led activity last year, and nearly 40 percent of overall secondaries volume, investment bank Greenhill reported last week.

“We actually found across several transactions in 2021 that diversification helped generate buyer interest,” he noted. “To Prospect Partners’ credit, they were an active participant in coming up with a holistic solution that was well-structured with strong alignment.”