Five Questions with Hark Capital’s Doug Cruikshank

Doug Cruikshank is head of fund financing and Hark Capital at Aberdeen Standard Investments, where he leads credit funds that make NAV loans to older PE funds’ portfolio companies. Cruikshank spoke with Buyouts about the evolving liquidity market within PE.

Please discuss the changing state of liquidity in PE.

As asset classes mature, which is what PE is continuing to do, they get more liquid, and they get more liquid in more spots along the chain. The chain goes everywhere from the very beginning, where capital call line banks provide liquidity early, on all the way to the end of the chain, which deals with secondaries.

[We] just provide another piece in that chain, after the investment period of a fund but before the fund really gets to the end of its life and doesn’t have any more assets. We’re a natural extension of the liquidity improving across this asset class, and we think that that’s a positive for both the LPs and the GPs. It’s good for the portfolio companies, too, because it gives them more liquidity to realize their management teams’ goals in terms of growing and maximizing value at those companies.

What is Hark Capital offering to GPs, and is it necessary in the market right now?

We target funds that are nearing or beyond the end of their investment period, where traditional capital call lines are no longer available and where the uncalled capital is either quite limited or gone.

[The loans are based on the sponsor’s NAV, not the credit profile of the individual portfolio company]. This allows us to support growth and support pivots in specific portfolio companies in a non-dilutive and cost-effective way, even later in the fund’s life.

Another theme that I’m hearing more about is the sheer volume of competition. How do you address that concern for the GPs that you’re working with?

I think competition and liquidity go hand in hand. GPs are under more and more pressure to perform for their LPs, and the more liquidity that’s available to them during the lives of their funds, the more ability they’ll have to maximize value.

Let’s say they’re seven or eight years into their fund, and they’ve got three opportunities to increase value in their portfolio — perhaps that’s a couple of add-ons to two of their portfolio companies and a change in the CEO and a pivot in another of their businesses.

They may not have the cash to do all three of those things, so they have to choose among those alternatives rather than taking advantage of all of them. We give them the liquidity they need to maximize value for their portfolio companies and their LPs, and by doing that, they then become more competitive in terms of their returns.

What types of LPs are you attracting to the Hark Capital funds? Do they look at you as a private credit allocation or do they look at you as a traditional private equity fund?

It’s a wide variety. We have institutional investors in the form of pensions, insurance companies, etc. We have some family offices, and a few individuals, but the vast majority is institutional money.

They look at us as somewhere between a private equity-type fund and a traditional credit fund, but a lot closer to a credit fund. We’ve found that the best investors for our funds are the ones who have good knowledge of the private equity space because they really understand what we’re trying to do and how we can be helpful.

You raised $200 million in Fund II in 2017. Do you see an increasing demand for the types of services you offer? Are you thinking about raising a third fund yet?

Not yet. Our focus right now is just successfully investing Fund II. But I think the need is going to grow. I don’t think competition is going away, by any means, and if one were to predict a recession at some point, it’s going to become even more difficult for PE firms to maximize value in their portfolio. The liquidity pinch is going to become more acute as fund lives roll on.

Action Item: Learn more about Hark, and contact Doug Cruikshank, through the firm’s website: https://harkcap.com/

Update: This story was updated to clarify the type of lending that Hark Capital provides to PE portfolio companies.