By: Bailey McCann, Private Equity Strategies
Former Thomas Weisel Asset Management LLC (Stifel, Nicolaus & Co.) leader, Henri Moudi, CFA, is launching Mission Creek Capital Partners, Inc., an independent investment advisory firm based in California. The company will provide private equity distribution management and advisory services on a discretionary basis for select institutional and private clients. So far, Mission Creek currently manages customized distribution management mandates for institutional clients with combined private equity commitments approaching $3.0bn.
The firm’s distribution management platform seeks to preserve and enhance overall cash-on-cash returns for private equity limited partners, executives and entrepreneurs on a separately managed account basis.
Weisel comes to this business with a background in helping some of the largest institutions like CalPERs manage private equity investments. “Our focus is on the back end of the private equity lifecycle,” Moudi tells Private Equity Strategies. “The appropriate management of exits is a crucial element of the private equity life cycle that is often overlooked and taken for granted. A lot of the people in this space have their fingers in a lot of pies. Clients and competitors often don’t know which hat they are wearing at a given time; we’ve opted to make this our core focus and remain independent, and unconflicted. We consider distribution management as a ‘core’ focus and not simply as an ‘ancillary’ service.”
Often instead of returning cash back to LPs, private equity firms distribute in-kind or give stock back. This is typically advantageous for both the LP and the GP in terms of tax efficiency and return. However, LPs need additional infrastructure in order to monetize these shares effectively so they can be redeployed.
“When a GP distributes in kind the very first day and the stock begins trading, the shares are usually down significantly as a lot of LPs seek to exit, and overwhelm the available liquidity,” Moudi explains. “Often as those shares are converted to cash they see a negative distribution decline typically of anywhere between 0-3.5% on the first day, but that can be significantly higher, our platform is designed to help mitigate that.”
The actual overall cash-on-cash return that the LP sees can be significantly different from what a GP reports. GP’s typically look at the value of distributed shares, while LPs are focused on cash-on-cash return. Moudi and his team look for catalysts that will better position the LP to take advantage of their shares.
“We take an area that has historically resulted in a negative detractor and create a source of additional outperformance,” he says. “Investors with a significant part of their portfolio in private equity commitments will find value here.”
Over the years, Moudi and his partner Charles Gehring, CFA, have developed experience using hedge and overlay strategies utilizing index and equity options to selectively enhance returns and mitigate risks on concentrated exposures. This experience provides the backbone for Mission Creek.
Moudi says that GPs typically make distributions so the recipient and the GP can each determine on an individual basis how to best time capital gains realization. “Private placements are limited in terms how much they can sell at any point in time, but if they distribute to LPs, there is a safe harbor allowance that will give greater flexibility to the exit than a private equity or venture capital firm would have otherwise.”
“When a distribution occurs, a third of the recipients sell quickly, a third sell within three months, and the remaining third hold on over the longer term, so it’s a way of putting more shares out into the market place with less impact on the stock’s liquidity than if they did one large block trade all at once. So it’s an important toolset that provides private equity funds additional flexibility. We can then help LPs realize the value of these distributions as well.”
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.