Park Hill Group has hired former Coller Capital executive Andrew Caspersen to focus on the growing opportunity to help GPs restructure funds that are approaching the end of their lives.
Caspersen, who started at Park Hill about five weeks ago as a managing principal, previously worked as a principal at Coller Capital until last year. He joined Coller in 2003, according to his LinkedIn profile.
“We’re seeing a lot of interest there from both LPs in older, more mature funds as well as GPs of those funds who want to monetise those portfolios through secondary opportunities,” Caspersen said in an interview Monday.
The opportunity to help GPs restructure funds is growing because “there is a lot of capital tied up in older vintages – call it the late 1990s to the early 2000s – that are approaching the end of their lives or are running through extensions,” Caspersen said. “They’re outliving their intended periods and their LPs are looking for distributions as well as lowering their administrative burdens and they’re eager to wind those funds down.
“At the same time, GPs are interested in managing the assets going forward and realising their full potential,” he said.
Park Hill is the fundraising and secondary broker affiliate of The Blackstone Group.
Another function of this opportunity relates to the challenging exit environment for GPs. IPOs can be tough to transact, and strategic buyers have cash but have not loosened their wallets for deals.
Ultimately, funds are simply living longer than LPs signed up for when they first agreed to commit, according to Larry Thuet, senior managing director and co-founder of Park Hill. In many cases, a 15-year fund life is not unusual, he said.
“The duration of the assets is a fundamental driver of this. If you signed up for a six year investment period, a harvest period and a couple extensions, you might have been hoping for 10 years all in,” Thuet said. “To be 50 percent longer than what you anticipated in one fund, that’s one thing, but across a portfolio of 50 funds, it starts to add up.
“The bunching up of assets and duration is a real problem,” Thuet said.
The issue of funds that live beyond their intended lives – also known as tail-end funds – is one that is widely acknowledged within the LP community. An investor survey from Coller Capital from December 2011 revealed that more than half of the 107 LP respondents to the survey believed they had funds in their portfolios in which the GP had no prospect of collecting carried interest and were motivated to keep the fund going simply to keep collecting management fees.
There are an estimated 250 funds that are at least 10 years old with at least $100 million in net asset value on the market, which equates to close to $100 billion of NAV residing in aging funds, according to Rudy Scarpa, a partner at fund of funds Pantheon who leads the firm’s global secondary efforts in New York.
“The duration of private equity funds is increasing significantly; it’s taking longer for GPs to exit portfolio companies, and as a result there are more funds that are reaching the end of their lives, or are in extension periods, that still have a significant amount of NAV,” Scarpa said.
What Scarpa called an “evolution of the market” will continue: “there’s so many ways to slice and dice these portfolios, you’ll see more of that as GPs try to be more creative”.
Last year, two headline-grabbing deals illustrated how secondary firms can help GPs restructure older funds.
Landmark Partners, Vision Capital and PineBridge Investments’ secondary team helped restructure Willis Stein’s 2001 vintage, $1.8 billion third fund by creating a new vehicle to house three remaining portfolio companies, allowing existing LPs to roll their interests over into the new fund, or cash out of their positions. The new fund got a five year life and charged management fees.
Canada Pension Plan Investment Board anchored a deal to create a new fund to house five Behrman Capital portfolio companies from its 2000 vintage, $1.2 billion third fund. The five portfolio companies paid a $40 million exit fee as part of the deal, though about 97 percent of that fee went to LPs who were cashing out, according to a person with knowledge of the deal at the time.
The two deals were examples of the types of options GPs have for their older funds, and as more and more of these maturing vehicles close in on the end of their lives, or work through life extensions, GPs and LPs will both be seeking solutions.
“The market right now is very much in the first inning,” Thuet said. “It remains to be seen if there’s going to be a natural acceptance of this solution in the GP marketplace, not unlike there was a natural acceptance of doing a secondary in the GP/LP marketplace eight years ago.”