Lee Equity raises new fund through secondary transaction

Lee Equity Partners turned to the secondary market to provide liquidity to investors in its first and only fund and to raise fresh capital for its second.

The firm, launched by Thomas H Lee after he left his eponymous firm in 2006, raised about $315 million for Lee Equity Partners Fund II, according to a Form D the firm filed earlier this week.

That total includes commitments from an investor group led by secondary buyer AlpInvest Partners. Lee Equity raised the capital for Fund II from 31 investors, according to the Form D. Other members of the investment group included HarbourVest Partners, the Canada Pension Plan Investment Board and Pantheon, Dow Jones reported.

Fund I LPs who didn’t sell their interests were able to hold them on existing terms, according to a person with knowledge of the deal.

The deal illustrates how some firms are coming to grips with ageing funds and LPs that are looking for an exit. GP-led restructurings have become a routine and growing part of the secondary market.

Other similar, recent deals involved Century Park Capital Partners, which recapitalized its 2005, second fund in 2014; Irving Place Capital, the former Bear Stearns Merchant Banking, which restructured its 2006, $2.7 billion third fund last year; and Veronis Suhler Stevenson, which as of last year was trying to restructure every active fund it managed.

The AlpInvest-led investment group bought out some LPs in Fund I, which closed on about $1.1 billion in 2008. The fund is fully invested but does have remaining capital earmarked for add-ons, the person said. The length of the investment period and the fund term of Fund II is not clear. It is also not clear if Fund II will raise more money.

Lee Equity Partners hired Park Hill Group to run the secondary transaction last year. The deal gave Fund I LPs the option to either sell their interest at a price pegged to net asset value as of Dec. 31, 2014, or roll their interests into the new fund. LPs were set to vote on the overall deal, as well as to decide whether they would sell or roll, in August.

That vote was delayed, according to several secondary market sources. It’s not clear why the vote was pushed back, but sources said LPs wanted to peg the sale to a more recent net asset value. It’s not clear if that happened.

Fund I had a rough early life, although the fund has recovered over time. One of its early portfolio companies, women’s clothing retailer Deb Shops, filed for bankruptcy in 2011. The firm acquired Deb Shops in 2007 in a deal valued at $395 million.

Fund I was generating a 7.8 percent internal rate of return and a 1.24x multiple as of Dec. 31, 2014, according to alternative asset data provider Bison. The firm had at least two exits last year, which likely affected Fund I’s performance, but more updated performance information could not be found.

Lee Equity completed seven add-ons and sold PDR and Edelman Financial Services last year.

Correction: A previous version of this story incorrectly stated that some Fund I LPs rolled their interests into the newly raised Fund II. Fund I LPs who didn’t sell their interests were able to hold them on existing terms.

Action Item: Check out the Fund II Form D here: http://1.usa.gov/1Z6xcTJ

Photo of Thomas H. Lee courtesy of REUTERS/Fred Prouser