Lexington collects $14bn for biggest-ever secondaries fund

Lexington Partners has beaten the target for its ninth secondaries fund to raise the largest ever pool of capital dedicated to the strategy.

The New York-headquartered firm held the final close on Lexington Capital Partners IX on $14 billion, ahead of its $12 billion target, according to a statement. The fund was launched in February 2018, according to Secondaries Investor data.

“This fund’s size gives us the ability to build a diversified portfolio globally across geographies and types and sizes of transactions,” Pal Ristvedt, a partner at the firm, told Secondaries Investor. “Ultimately, however, each investment must stand on its own merit and also reflect where we are with respect to capital market cycles.”

LCP IX will invest across private equity and other alternative asset strategies, including direct investments, equity co-investments and hedge fund private equity strategies. The firm also expects to benefit from the growth of the GP-led secondaries market.

The fund will be able to invest in a range of asset classes, though Lexington and LCP IX are “firmly rooted in the private equity world”, Ristvedt said.

At $14 billion, LCP IX is 26 percent larger than the previous record holder – Strategic Partners‘ Fund VIII, which amassed $11.1 billion in July. LCP IX is also almost 39 percent larger than its predecessor, a $10.1 billion vehicle raised in 2015.

The fund began investing in the fourth quarter of 2018 and is already 30 percent invested across more than 30 transactions. Deals the firm is understood have to invested in using LCP IX capital include the purchase of a $1.3 billion portfolio from Japan’s Norinchukin Bank last year; a stapled deal involving two of TPG’s Asia funds; a GP-led process on Vitruvian Partners’ 2007-vintage fund and a strip sale by Eurazeo used to seed the Paris-headquartered firm’s €700 million Eurazeo Capital IV flagship buyout fund.

More than 450 LPs backed the fund, according to the statement.

LCP IX charges 10 percent carried interest and has a 7 percent hurdle, according to the University of Houston System board of regents’ endowment management committee meeting from May 2018. The carry will increase to 12.5 percent if the fund achieves a preferred return of 10 percent, and catch-up is 100 percent, the documents show.

Commenting on the size of the fund, Wilson Warren, president and partner at Lexington, told Secondaries Investor: “We can provide large-scale solutions for holders of these assets. A large pool of capital, a firm with a global footprint and a very experienced team across transactions types allow us to effectively evaluate and prioritise the transactions available to us in the secondary market.”

The $14 billion raised is discretionary capital and does not reflect the potential for additional co-investment interest, according to Warren.

LCP IX can also make primary investments, with less than 10 percent of the capital allocated to such commitments.

According to the University of Houston documents, all LPs will incur a fee of 0.5 percent on the “primary investment FMV allocation and uncalled capital on primaries”.

Asked how the firm was preparing for a possible market correction after having raised the largest fund dedicated to secondaries, Ristvedt said secondaries funds in general have the ability to perform across market cycles.

Fundraising for secondaries strategies dipped to a four-year low last year, when at least 32 funds collected $36.9 billion in the 12 months to the end of December – a 22 percent drop on the previous year and the lowest annual fundraising figure since 2015, Secondaries Investor reported on Monday. According to estimates by investment bank Greenhill, the ratio of dry powder to deal volume over the period could be at a record low going into 2020, thus shifting the power back to buyers.