The name game: restructurings

This week Secondaries Investor exclusively reported news of another successful fund recapitalisation.

A group of secondaries buyers led by Strategic Partners and Goldman Sachs recapped a pair of funds managed by Crescent Capital Group. LPs were given the option to liquidate their stakes or to roll over into a new vehicle.

That follows last week’s story about Nova Capital Management’s bid to recap two Fenway Capital funds and Centre Lane’s efforts to restructure five Perseus Capital funds.

My phone’s been ringing regularly with sources wanting to discuss these types of increasingly prevalent secondaries transactions. And more often than not callers also want to debate terminology. It seems one person’s ‘restructuring’ is another’s ‘recapitalisation’.

This isn’t a new issue per se; I addressed it at the beginning of the year when some market participants were insisting that neither ‘restructuring’ nor ‘recapitalisation’ were appropriate for these deals, arguing the more accurate term was ‘liquidity solution’.

It’s hard not to feel like it’s all just spin for the parties involved; a number of people have told me that ‘restructuring’ has too negative a connotation for their liking. But to move the debate forward, I challenged various sources to give clear definitions for a fund restructuring versus a fund recapitalisation – and found a great deal of inconsistency.

“I’d hate to get too tied to the terms because unfortunately people use them interchangeably,” one secondaries buyer told me.

A portion of the market thinks the difference between the two is whether the existing GP is seeking to leverage the existing assets for fresh capital. “Where there’s primary capital it’s a recap,” one US-based advisor said.

“In order to put new capital in at the fund level the LPA will have to be amended,” said a UK-based lawyer, noting that in these situations the buyer effectively acts as a lender but also offers LPs the option to participate in the loan. “A recapitalisation gives LPs more options, but that optionality comes at a price.”

Meanwhile, one source said the definition is less about whether or not fresh capital comes into play and more about the options given to LPs. In his view, a fund restructuring is when the LPs are given just two choices: to sell their interest or roll it into a new vehicle, which typically features an elongated investment period and resetting of GP economics. It becomes a recapitalisation when LPs are also given the option to maintain the status quo, according to one secondaries fund manager, who added that investors should be able to live out the life of the fund they signed up for. “It boils down to what features are being offered.”

And yet another source argued there are few differences between the two terms. “One could argue that a restructuring does not necessarily include new capital for the GP to invest (it only focuses on managing the existing portfolio) and a recap would include some follow-on capital or dry powder,” one secondaries GP said. “There really is not a big difference between a restructuring and a recap deal.”