Doughty Hanson is the latest fund manager to offer its limited partners a liquidity option for positions in older funds, Secondaries Investor exclusively revealed on Wednesday.
In October 2014, Credit Suisse was hired to run what sources have called a narrow process, inviting a handful of parties with an existing relationship with Doughty to potentially fund the GP-led transaction. The idea was to find a buyer who could provide both an exit route for LPs in its 2003-vintage Fund IV and 2007-vintage Fund V, while also providing fresh capital for Fund VI, which began marketing in 2013 with a €2 billion target, according to PEI Research & Analytics.
Of the various potential buyers, HarbourVest soon emerged as a natural choice, according to sources familiar with the deal.
The funds of funds house had committed to all of Doughty’s private equity vehicles over the years, starting with its 1990-vintage Fund I, and its secondaries team has played a key role in a number of fund recap-type transactions, like the $430 million restructuring of Motion Equity Partners II.
“They have followed Doughty’s portfolio for a long time and are happy with the team. They are confident in the future of the franchise,” one source explained. As of 31 December 2014, Fund IV was generating a realised multiple of 2.2x and a net IRR of 24 percent, according to another source, while Fund V was generating a 1.9x multiple and a 17 percent IRR.
Thus in less than four months – a rapid time-frame for such deals by any measure – a €215 million stapled transaction was completed.
HarbourVest offered LPs a set price for their interests in Doughty’s €1.5 billion Fund IV and its €3 billion Fund V (whose remaining net asset values were together valued slightly above €3 billion as of June 2014). In total, HarbourVest paid €150 million, said to be a modest discount to NAV, to buy out the LPs wanting liquidity. It also provided a €65 million commitment to the firm’s Fund VI, in line with the size of its prior primary commitments to Doughty funds.
Only a handful of LPs actually sold their stakes as most of the value in the deal came from Fund V, which has four remaining assets, according to Doughty’s website.
Fund IV also has four remaining investments, but they are reasonably mature and likely to be sold in the next few years – so many LPs preferred to let the realisations happen naturally, one source explained. That also makes it a relatively quick return of capital for HarbourVest.
Also notable was that LPs that opted to retain their stakes were not forced to accept any reset on fund terms or changed economics, sometimes a feature of restructuring deals.
“In this case, if you decided not to sell, you’re in exactly the same place,” said Mark McDonald, a director in the private fund group at Credit Suisse. “This makes it a win-win for LPs in top-performing funds.”
This was similar to HarbourVest’s approach with the Cognetas/Motion Equity restructuring, in which LPs were also offered a set price for their interests or the option to stay in the vehicle with the original terms.
“A lot of the buzz around restructuring is that it isn’t LP-friendly, but these two deals have been, with no reset of the economics or terms,” another source said.
For that reason, some market participants say that ‘restructuring’ is actually a misnomer for these types of secondaries deals, suggesting they simply be referred to as ‘liquidity solutions’. That’s in line with a shift away from what market observers originally thought would dominate this part of the secondaries market: recapping poorly-performing zombie funds and replacing their management.
“The migration is toward GPs with better assets and cleaner stories because there are no reasons why a good-willed GP wouldn’t try to do the right thing for LPs,” one US-based advisor said.
The question is, whose fund will be next?
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