Credit Suisse sweetens terms on $2.9bn fund

Credit Suisse’s Strategic Partners group expanded its focus while fundraising for its fifth secondary fund, visiting regions of the world like Asia where it had not traditionally looked for capital.

While the team got some contributions in Fund V from limited partners outside the US, it did lay a foundation for relationship building that it hopes will translate into commitments to future funds, according to Stephen Can, global head of the bank’s Strategic Partners group.

“We spent time in Europe, in the Middle East and we’re starting to make relationships in Asia and other parts of the world,” Can told Private Equity International during an interview Wednesday. “We’ve done a lot of work for future funds; as you see different [institutions] in different countries develop and they start to move into alternatives, secondaries are a great way to start and enhance alternative investment programmes.”

Credit Suisse announced Wednesday it closed its fifth secondaries fund on $2.9 billion. The fund will focus on investments in buyout, real estate and venture capital funds.

Fundraising took about a year, Can said, and the fund is about 10 percent bigger than the fourth fund, which closed on about $2.5 billion in 2009. The Strategic Partners team was assisted in fundraising by an internal marketing group that works on Credit Suisse specific funds, which is separate from the bank’s third party placement agency, which raises external funds.

Credit Suisse and the Strategic Partners team contributed an about 3 percent commitment to the fund, which was lower than the historic 5 percent contribution because of the Dodd-Frank financial reform rules. Under Dodd-Frank, the so-called Volcker rule restricts financial institutions from investing more than 3 percent of its Tier 1 capital in private equity.

The team offered some sweetened terms in Fund V. Strategic Partners employed a “European-style” waterfall distribution scheme in Fund IV, in which the GP only started to collect carried interest after LPs were paid back committed capital plus an 8 percent preferred return.

For Fund V, the team enhanced the distribution scheme to include not only all committed capital, but all fees and fund expenses as well that must be returned to LPs, plus the 8 percent preferred return, before the GP starts to collect carried interest.

“That’s as full as you can get and we just pushed everything over to that side and made sure LPs got as friendly as terms in that regard as they can imagine,” Can said. “We read the [Institutional Limited Partners Association] document and we had some early discussions with our LPs and we just made a decision early-on that they’re our partners, the community wants this and we’ll do it.”

The team started investing Fund V last year and has a loaded deal pipeline, Can said. Strategic Partners averages about $15 million per deal, but looks for investments that could go as high as $500 million, Can said. The team, except by great exception, will not go higher than 10 percent of the fund for any one deal, he said.

The team brings fresh capital into what could be the busiest-ever year for the secondary market. Market professionals have predicted total deal volume could exceed last year’s record total of about $25 billion. Sellers on the market include financial institutions in the US and Europe unloading private equity assets because of regulations, and public pension systems actively managing their private equity portfolios to cut down the number of GP relationships. Also, hedge funds that loaded up on illiquid assets in the credit bubble years have also been selling stakes in funds over the past few years.

Buyers and sellers should be pretty close in expectations on price, Can said, unless “impaired” assets are for sale. “On impaired assets, you’ll see the widest spreads [between buyer and seller expectations],” Can said.

The Strategic Partners team is working on 35 deals and has about 50 potential transactions in the pipeline, Can said. Buyers love when product is plentiful, Can said.

“We’re busy … as a buyer you can’t be any happier,” he said.

However, the team sets a price and sticks to it, and won’t “play games” on changing the price, he said.

“We’re firm on price. We transact, we don’t re-trade. We have a price and if that’s not a price that works for the seller, then it doesn’t work,” he said. “It makes life easier and more efficient all around once you get that reputation in the market.”