Prudential backs Fenway restructuring – exclusive

The investment arm of the insurance giant has offered investors in the private equity firm's two latest funds the option to cash out.

Prudential Capital Group has emerged as the buyer in the latest attempt to restructure Fenway Partners‘ 1998- and 2006-vintage funds, Secondaries Investor has learned.

Limited partners in New York-headquartered Fenway’s two most recent vehicles will vote at the end of May on whether to support the restructuring process and whether they want to sell their stakes to Prudential Capital, according to four sources familiar with the deal.

The process involves between $300 million and $400 million of net asset value across Fenway Partners Capital Fund II and Fenway Partners Capital Fund III, according to two of the sources. Prudential Capital is offering to buy LPs’ stakes in the $1 billion Fund II at a 60 percent discount to net asset value as of 31 December and a 20 percent discount on the clawback owed to LPs in the fund.

LPs in Fund II also have the option to receive 100 percent of the clawback owed on the fund, one of the sources said, although further details were unclear.

On the $702 million Fund III, LPs can sell their stakes at a 35 percent discount to the same valuation date.

The plan is to move the four assets into a new vehicle managed by Fenway. One of the sources noted that Prudential Capital will control the assets post-transaction and that Fenway will have a managing role in the assets that will be “at the discretion” of Prudential Capital.

It is understood that Moelis is advising on the process and that Ropes & Gray is providing legal advice to Fenway.

“We had two choices – either to support the potential sale or not. Neither choices were particularly attractive to us,” an LP in one of the funds told Secondaries Investor. “It’s a frustrating situation for several reasons, everything from unprofitability to cross-fund investing. That’s why you’re ending up with a sale of both funds rather than just specific assets, because of the cross fund valuations and other complicated issues.”

In 2015 Fenway attempted to recapitalise the two funds, with London-headquartered direct secondaries firm Nova Capital Management emerging as one of the four final bidders in the process that was also run by Moelis, as Secondaries Investor reported at the time.

According to three of the sources, Fenway’s exposure to football helmet-maker Riddell Sports has made previous restructuring attempts difficult and the latest process unattractive to traditional secondaries buyers. Fenway holds its stake in Riddell through sports equipment company BRG Sports, which it created through three investments made in the early 2000s: Riddell, Bell Sports and Easton Sports. The three were combined to make Easton-Bell Sports, which was renamed BRG in 2014.

Riddell is facing class action lawsuits that allege it failed to protect American football players from the effects of concussions. The company is defending the claims.

The company’s helmets are worn by up to 60 percent of NFL players, according to reports.

Fenway holds three other assets: American Achievement, a manufacturer and supplier of high school and college commemoration products; Fastfrate, a Canadian logistics provider and Preferred Freezer Services, the US’s third-largest public refrigerated warehousing company, according to its website.

Fund II delivered a 1.25x multiple and a 5 percent internal rate of return as of 30 September, according to a performance document from the Oregon Public Employees’ Retirement Fund.

Fund III delivered a 1.14x multiple and a 2.3 percent internal rate of return as of 31 December, according to an LP in the vehicle.

LPs who committed to Fund II include City of Philadelphia Board of Pensions & Investment and Rhode Island State Treasury, while Fund III attracted investors including Oregon State Treasury and New York City Retirement Systems, according to PEI data.

Chicago-headquartered Prudential Capital is the private placement investment arm of insurance giant Prudential Financial. The insurer is an LP in Fund III.

Prudential Capital, Ropes & Gray, Fenway and Moelis declined to comment.