The good, the bad and the old: finding value in challenging deals

Reporter Adam Le here, filling in while Marine’s on the West Coast. Two stories I reported on this week stood out in my mind as they both involved older funds and how – and whether – to find value in them.

Zombies, Asia and challenging deals
Our research division recently took stock of its funds database and found 1,001 so-called ‘zombies’, or funds raised more than 10 years ago by GPs who haven’t raised subsequent vehicles and – as one source put it – are “sitting back taking long lunches” as they continue to collect management fees on unrealised assets.

Remaining net asset value in these funds is estimated at around $127 billion – a number that’s hard to ignore. But a lot of secondaries buyers say it’s sometimes best to do just that.

“The challenge with these funds is, why are these companies left in the fund?” said the head of a firm specialising in direct secondaries and tail-end deals. If you do these types of deals, he mused, “Are you just left with a bunch of underperforming businesses that [are] going to be very difficult to sell?”

That’s the same question buyers will be asking themselves before wading into other challenging pockets of opportunity, like restructuring funds or doing directs in Asia. Sources on the ground say public market volatility and other factors contributing to a lack of exit options in China and India is providing some interesting secondaries deal flow – but those countries have their share of underperforming zombies to be wary of, too.

No room in the fund
Most frequently you hear about large LPs selling fund interests because they’ve had a strategy shift (a move away from mega-buyouts, say, or a changed appetite for a particular sector or geography). Or, even more typically, they’re wanting to reduce relationships with managers deemed non-core to devote more time and resources to preferred GPs. So we were pretty interested to learn the rationale behind CPPIB’s sale of its Bridgepoint holdings wasn’t so standard.

CPPIB had been an investor in the pan-European fund manager since 2002, when it committed €100 million to Bridgepoint II. It went on to commit €100 million to Bridgepoint III in 2005, and in 2007 committed €300 million to Fund IV. It’s also co-invested with Bridgepoint in at least one deal, taking a 39 percent stake in 2012 in sports management company Dorna. But when Fund V came around – which closed in March on €4 billion after a year of fundraising, beating its €3.5 billion target – there weren’t enough places for large LPs to accommodate CPPIB.

This prompted Bridgepoint to offer to buy back some of the pension’s holdings in its prior funds, and ultimately led to a deal with Lexington, Hamilton Lane and Bridgepoint buying CPPIB’s stakes. It seems a neat solution for a high-quality problem (a fund manager with more demand than it can meet and an LP keen to prioritise relationships with potential to keep growing). But is it a one-off or are we likely to see more of such deals?

I’d love to hear your views. Get in touch at adam.l@peimedia.com