While continuation funds are a handy way to deliver liquidity back to limited partners in older funds, they also give a manager the chance to hold a particular asset longer when they see more room for growth.
That was the case with KSL Capital Partners’ ski resort investment, Alterra Mountain Co, which the firm recently moved into a continuation fund in a deal valued at more than $3 billion.
The firm sought the secondaries process to satisfy LPs who were looking for liquidity – a common refrain among investors in today’s low-exit environment.
“There is a confluence of factors where existing investors had achieved a very strong return, and so given the liquidity constrained environment that they’re dealing in, we were getting requests from LPs to monetise what was clearly a very successful investment,” explained Peter McDermott, KSL’s chief investment officer, in an interview with PE Hub.
“On the other hand, you had a significant portion of our LPs who see tremendous future growth in the business and so a continuation vehicle offered the opportunity to satisfy both constituents,” he added.
The continuation fund has a 10-year life, including extensions, and comes with its own set of fees and carried interest. McDermott declined to disclose investors involved in the deal. Affiliate title Buyouts previously reported one investor was Singapore’s sovereign wealth fund GIC. KSL held Alterra in its second and fourth flagship PE funds and needed to get consent from the various LPACs for the deal.
KSL anticipates organic EBITDA growth in the high single to low double-digit range. Skiing is a unique industry that attracts affluent customers.
“We see very strong organic growth in the business, minor volume growth, ability to grow ancillary revenue, ability to grow pricing in excess of inflation,” McDermott said. Although the ski business has high fixed costs, KSL Capital said it will leverage this by operating at scale.
There are also opportunities for accretive M&A, according to McDermott.
A continuation fund made sense as other exit paths seemed less attractive in the current market, McDermott said. The company has an enterprise value of about $7 billion, limiting its potential buyer universe. And public markets were not a viable option because of redevelopment works at Alterra which might not have given the company a proper valuation.
“With a continuation vehicle,” said McDermott, “we were able to achieve what we think is a full and fair value for the company for the investors that were seeking liquidity and also satisfy our investors wanting to stay in the deal”.
The deal structure
There is no substantive change in deal structure, according to McDermott. “We have a minority joint venture partner and nothing happened to that capital,” he said. “On the KSL side, we are just replacing old vehicles with new vehicles and a different mix of investors.”
Alterra was established through a joint venture with an affiliate of Henry Crown & Company. The company was formed in July 2017 with the combination of Intrawest Resorts, Mammoth Resorts, Palisades Tahoe and Deer Valley Resort.
Although this was not the first continuation transaction for KSL, it was the biggest. Previously, KSL Capital moved its portfolio company Ross Aviation into a continuation fund when it was merged into Atlantic Aviation, which is a KKR-controlled company. That deal was valued at about $600 million.
The process also came at a time when there were significant challenges in the fundraising environment.
“We knew that targeting $3 billion would be a big effort,” McDermott said. “The business is so unique and a lot of the investor community likes to ski, so it’s easy to make a natural connection with LPs. There is a good understanding of the business.”