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Hellman & Friedman eyes cross-fund deal to move older assets out of 2009 pool

The private equity firm’s latest fund, the $16bn Capital Partners Fund IX, is understood to be participating in the transaction.

Hellman & Friedman is working on a deal to move three assets out of its seventh fund and into a continuation pool for more time to manage the assets, four sources told sister title Buyouts.

The San Francisco-headquartered firm is just the latest in a string of well-established GPs to use the secondaries market to sort out older funds. Other GPs running secondaries on older funds and assets include Audax Capital Group, Summit Partners and Clearlake Capital Group in what has become a frenetic side of the market. 

In this case, Hellman & Friedman would give LPs in its Capital Partners Fund VII the option to cash out of their interests in the assets or roll their stakes into the continuation pool. The total value of the deal could come between $1 billion and $2 billion, some of the sources said. 

Hellman closed Fund VII on $8.9 billion in 2009, according to PEI data. That fund was generating a 23 percent internal rate of return and a 2.7x multiple as of 30 March, according to performance information from the California Public Employees’ Retirement System. 

An intriguing aspect of the Hellman deal is that the firm’s newest pool, Hellman & Friedman Capital Partners Fund IX, would participate in the secondary. The ninth fund “is expected to participate alongside secondary investors”, one of the sources said. Hellman closed Fund IX on $16 billion in 2018.

GPs using newer funds to participate in secondaries processes for older funds is relatively rare and comes with some controversy. While secondaries investors generally like to see GPs participate in their own secondaries deals, cross-fund type transactions can be a tougher sale to limited partners in older funds. LP concerns focus on the potential for pricing conflict – the newer fund wants to buy at the cheapest price possible, while LPs in the older funds want to sell for as much as possible. 

“If the GP is putting money from the newest fund … it sends the following signal: ‘We’re expecting this to generate an attractive enough return that we’re putting the new fund in it,’” said a secondaries market professional. 

Existing LPs could have concerns, as has been the case with cross-fund type transactions in the past. “If you think it’s the right time to sell these, then go sell them,” said another secondaries professional. 

Hellman & Friedman used a similar strategy in a past deal. In 2018 the firm ran a single-asset secondary on its tech-company Kronos Inc. In that deal, investors, including Hellman’s Fund VIII and Blackstone, lined up to buy out LP stakes in the company, which was held in Hellman’s sixth fund. The Kronos deal required approval from the limited partner committees of both Hellman funds, and included two fairness opinions. 

Another deal that included a cross-fund opponent was Revelstoke Capital Partners’ single-asset secondary for Upstream Rehabilitation. Revelstoke participated in the transaction alongside Coller Capital to move Upstream Rehabilitation out of Fund I and into a continuation pool, sources said. 

Hellman, meanwhile, has been sorting out another older pool, the 2007-vintage Fund VI, as it reaches its term. LPs in Fund VI approved a one-year extension on the pool, giving the firm more time to manage out remaining assets. 

Overall, the first-half had a significant slowdown from the same period last year for secondaries activity. Total deal volume came in around $18 billion between January and June, a drop of 57 percent from the $42 billion tallied during the same period last year, according to Greenhill’s first-half volume report.

Things are looking up as deals are coming online. GPs are more interested than ever in finding ways to extend holds over certain assets as exit timelines are pushed out because of the market havoc from the pandemic. The second half is expected to potentially be busier than prior years, Buyouts reported recently in an in-depth look at the secondaries market.

A spokesperson for Hellman & Friedman declined to comment.

– This report originally appeared on sister publication Buyouts.