Probitas patents ‘counterparty’ liquidity product

Probitas Partners is quietly shopping to its global client base a proprietary liquidity vehicle that would match cash-strapped LPs with counterparties eager to help fund future capital calls.

The San Francisco-based private equity advisor has been fine-tuning the vehicle, called Prospective, since last year and has gone so far as to seek a patent for key aspects of the product, a move Probitas executives believe will prevent rival firms from creating copy-cat products.

To date no such Probitas-backed counterparty contracts have been agreed, but a source close to the firm said continued stock market weakness, mixed with a new wave of capital calls from GPs, would likely spur clients to action.

Prospective is structured whereby Probitas acts as a general partner committing client capital directly to limited partners who want help meeting future capital calls to specified funds. Technically, GP approval is not required in such a structure, as it is in traditional secondaries deals. In addition to management fees, Probitas would charge a negotiated, graduating incentive fee to the counterparty.

The functionality of Prospective differs markedly from a traditional secondaries transaction. The structure calls for the limited partner to essentially break its fund interest into two parts: capital already invested, and capital yet to be called down. The Probitas product only creates a contract between the LP and the counterparty investor with regard to future capital calls. The counterparty and the existing LP agree to fund their respective portions of future capital calls.

The source close to Probitas said the product, if adopted by LPs, would solve a major problem in the secondaries market, that being a transactional paralysis resulting from a very wide bid-ask spread. Many limited partners are unwilling to complete secondaries transactions for more recent vintages of private equity funds because offered the discount to NAV is dramatic.

In the meantime, many of the same LPs are hamstrung by enormous undrawn capital commitments to these funds and are searching for ways to reduce their ongoing capital call liabilities and private equity allocations.

The source said the ability to enter a fund halfway through its investment period appealed to certain major non-US investment programmes, who want to establish relationships with well regarded GPs as well as to invest in what many believe will be a string of strong vintage years. But LPs also want to avoid exposure to the investments made during the 2005-to-2007 period.