Perseus’ five legacy funds finally have a new owner in distressed investment firm Centre Lane, giving longstanding LPs a liquidity option. But it wasn’t your average secondaries deal.
This week Secondaries Investor revealed 20-year-old private equity firm Perseus Capital had finally completed a long-awaited restructuring process, having been plagued by poor fund performance, its founder’s unexpected death in 2012 and a subsequent legal battle around his alleged fraud.
Distressed investment firm Centre Lane Partners was selected to take over Washington, DC-based Perseus’ remaining assets, in what market observers say was one of the most complicated restructurings to yet occur, given many of the portfolio companies were shared between Perseus’ different funds.
In a process led by Cogent Partners, Centre Lane assumed control over all five Perseus funds including its largest and latest, Perseus Partners VII, which raised $602 million in 2006.
Limited partners were given the option to liquidate their stakes for quite a steep discount – 85 percent to 90 percent of net asset value – or roll their interests into new vehicles managed by Centre Lane. An overwhelming majority chose the latter, despite not being pleased with either option, one LP explained. “It was a dismal situation; we really disliked both options.”
Centre Lane is now left with roughly 11 of Perseus’ portfolio companies including Perseus Books, which had struggled to find a buyer all last year. Other companies include Sirius Thinking, which used to co-produce US children’s television show “Between the Lions”, and Frankfurt-listed environmental product company Twintec.
What made things particularly complex was that the portfolio companies were shared between Perseus’ funds. So instead of moving assets straight across from five old to five new funds, Centre Lane grouped them into two new vehicles. (Sources declined to discuss the rationale for which assets were clustered together.)
Also making things complex was that this wasn’t Perseus’ first restructuring attempt; it had tried to orchestrate a deal on its own in 2013 that would have handed control to NewGlobe Partners (the team now running ICG Strategic Secondaries). LPs vetoed that transaction, reportedly unhappy with the 60 percent discount to NAV that was offered and lack of a formal auction process. New York City Retirement System’s CIO at the time, Lawrence Schloss, reportedly called the process “outrageous” and “disruptive” in a formal letter expressing his displeasure.
“It was kind of crazy; we all wondered why the firm wasn’t running a competitive process,” one LP recalled, noting if the restructuring had happened in 2013, the pricing would have been more attractive because the portfolio was in better shape and the process would have ultimately been more efficient.
Perseus went on to hire Cogent in late 2013 to appraise the five funds and in 2014 it ran a two-round auction process over a six-month period, resulting in three final round bids.
LPs were approached in the middle of the fourth quarter and had to decide what to do quickly, with some, like the Norfolk County Retirement Board, calling emerging meetings to hash out their options. The funds’ investors ultimately came to an agreement and the Centre Lane deal was closed before year-end.
Another thing that made this restructuring slightly different to others we’ve seen to date was the buyer. Typically, dedicated secondaries firms, fund of funds and some large institutional investors have been the groups funding most restructurings and other ‘liquidity solutions’, which Cogent estimates made up about 25 percent of last year’s $42 billion in deal volume. But in this case, a primary GP found the secondaries market a means to deliver assets in line with its investment strategy. Perhaps we’ll see more firms like Centre Lane back restructuring transactions as a unique way to buy bargain assets and gain new investors.