Each year, a number of private equity funds end their lifecycle. Some do that successfully, others become zombies, stuck in a variety of circumstances that prevent exits. A new strategic investment partnership seeks to find opportunities in those funds and give zombie GPs a way out. NewGlobe Capital Partners and Vanterra Capital are teaming up to acquire interests in these end-of-life and zombie funds that will release liquidity to the funds' limited partners and reset the investment time horizon for general partners (GPs) and their portfolio companies.
NewGlobe is an independent secondaries investment firm focused on buying LP interests in mature private equity funds and on leading fund recapitalization deals. Vanterra focuses on building specialized private equity fund platforms that have a unique competitive advantage within specific strategies, and will provide financial, strategic and operational support to NewGlobe. Additionally, Hamilton Lane will provide capital for NewGlobe transactions. Hamilton Lane has approximately $171bn in total assets under management and supervision.
"We dislike the name zombie fund, there are some funds that do deserve the name but a few just got stuck. We prefer the term disrupted cycle funds," says Andrew Hawkins, founder and CEO of NewGlobe Capital Partners, in an interview with Private Equity Strategies.
Through the partnership, both firms are offering GPs a new type of structure that emerged out of a deal Hawkins worked on with Willis Stein. That deal provided a framework that Hawkins and the rest of the team now customize to go after similar opportunities.
In essence, Hawkins offers a tender buyout of all of the LPs in one of these disrupted funds. That process gives LPs the option to take the cash from that offer, or they can roll into a new vehicle with new economics. Those economics are then shared between New- Globe and the incumbent GP. The structure lowers the risk of overpayment through an alignment of interests and also resets the clock for underlying portfolio companies. Unless half the LPs sign on, the deal won't go through.
"This isn't a traditional buyout model, but it uses those investment skills to support the incumbent GP and evaluate the underlying companies," Hawkins says. Both firms have a background in the private equity secondaries market, and direct investing. Principals at Vanterra worked on spinouts arising out of the Lehman Brothers collapse. Prior to starting NewGlobe, Hawkins and his partner Christophe Browne worked together at Vision Capital leading secondaries transactions in New York and London.
Hawkins explains that each deal using this vehicle has its own moving parts, the Willis Stein deal took over 6 months and all told had over 1000 pages of legal documents. Despite that, the upside for incumbent GPs and LPs alike is clear - both parties have a way out of what is otherwise a stagnant situation.
There are benefits for the underlying companies too. "Portfolio companies in a tail-end fund often have the same characteristics – they have not achieved their exit expectations and in many cases have not had clear, strategic guidance in the last 5 years - there is no new capital and the management team often feels dejected. With this structure, we can put new capital to work in those companies and transform the underlying business while resetting the clock," he says.
The opportunity set is fairly large according to Hawkins, right now there is a growing pool of stuck assets amounting to approximately $75bn or 5% of the market in the US and Europe. "We expect this opportunity set to last for several years, we're just seeing the 2003 vintage years now, so there are other much larger vintages like ‘06 and ‘07 that we see opportunities in down the line," Hawkins says. "Very few people avoided the crime of over paying between 2005 and 2008.
There are deals in this space across all industries and fund sizes, it's not just a problem for small and middle market firms. There are big funds out there with these same issues."
By launching with this partnership, the principals were able to get into the space without first spending months or years fundraising. So far, their competition is virtually non-existent leading GPs to reach out to them. "The transparency we get from the GPs we work with is astonishing. They're truly focused on finding the best solution. Over the next 2 years we could deploy $1bn in capital, some of that could even come quicker than we expect. The counterparties are heavily engaged with us and from a deal flow perspective this is as good as it gets," Hawkins says.
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.