A handful of new entrants have emerged in the preferred equity space in recent months. How do you navigate increased competition in this area?
DP: We estimate more than $1 trillion of residual assets remain in mature funds and our view is that this opportunity is definitely large enough to support a number of successful firms.
The main difference between Crestline and our primary competitors is our position as a credit-focused institutional alternative asset manager, which facilitates our origination channels and our deal structures. While most of the other teams come almost exclusively out of PE secondaries firms, Crestline’s team is comprised of direct investors with experience in traditional and structured credit, as well as private equity secondaries.
Tell us about Crestline and its activity in the preferred equity and fund restructuring space.
DP: We first entered the preferred equity and fund restructuring space in 2013 in response to the growing wave of maturing private equity funds. Unprecedented fundraising in the private equity market prior to the financial crisis created a wave of tail-end and mature private equity funds that are now past their investment periods and rapidly approaching the end of their structural lives.
Our initial efforts centred around underperforming funds, however, we are now more focused on mature but successful funds and a variety of special situations. Our offerings include a range of preferred equity and lending structures that deliver new capital. In certain transactions, we also offer additional management resources and access to our broader platform capabilities to the management teams that require them.
We launched our complete portfolio financing and fund restructuring offering in October 2016 and, as of June 2017, our team has led more than $500 million in transactions across six deals.
What types of deals do you seek and how do you tackle deal sourcing?
DP: For portfolio financing deals, we seek successful managers that are aligned with their current investors and can demonstrate that a financing transaction would be accretive. We focus on portfolios with high-quality assets that have sustainable value and clear paths to liquidity. Generally, the borrowers (or issuers of preferred equity) are mature funds that are past their investment and recycling periods. However, we also have worked with younger funds and evergreen vehicles that have unique needs for additional capital.
For fund restructuring transactions, we still focus on stressed or special situations that do not provide existing investors with attractive status quo options. We also look for transactions where the manager is willing to cede some level of up-front control or grant us step-in rights if asset or portfolio level milestones are not met.
Fort Worth, Texas-based Crestline was founded in 1997 and is an institutional alternative investment management firm that specialises in credit and opportunistic investments. The firm had more than $8 billion in assets under management and more than 140 professionals across offices in Fort Worth, New York, Chicago, London, Toronto and Tokyo.