Golden Gate Capital is running low on dry powder in its $1.8 billion second fund, and is hitting up LPs for a $600 million bridge vehicle (as first reported yesterday by LBO Wire). Why raise a small amount of interim capital instead of just raising Fund III? Because sources say that Golden Gate is going to need some extra time to convince LPs that they should participate in an evergreen fund structure going forward (as not reported yesterday by LBO Wire).
Evergreen structures are highly-unusual in the private equity market, with General Atlantic being the only large firm I know of to employ them. In fact, a number of experienced, non-GGC LPs I spoke with yesterday didn’t even know how they really work. That was too bad, because such an explanation was exactly the reason for my call.
But, thankfully, I was able to secure a quick primer from General Atlantic managing director Tom Tinsley. He explains that limited partners (or “capital partners” in GA parlance) commit to General Atlantic at a time of their choosing, so long as the firm agrees to accept them. Right now, most GA money comes from family offices that have committed a minimum of $100 million. The firm then begins deploying the capital, and goes back to its capital partners for additional capacity when needed. For example, General Atlantic last year raised its capital capacity from just under $4 billion to exactly $5 billion, with a little more than half of the increase coming from existing capital partners.
Each new capital partner is permitted to negotiate its own economic terms. But if a capital partner joins in 2003 at more LP-friendly terms than did an LP who joined in 2001, the revised terms will apply going forward to all LPs on an MFN (most favored nation) basis.
The primary upsides of evergreen funds are firm stability and added flexibility in making forward-looking investments in talent and geography. On the flipside, evergreen funds don’t provide as much standardized accountability as to traditional fund structures, and also can be administrative nightmares for the general partner. For example, imagine having to calculate individual clawbacks for each LP, because each of them bought in at a different time.
Golden Gate did not return a request for comment. Just for clarification, the $1.8 billion vehicle was raised in 2004, and actually is a general fund plus a sidecar fund.