As private equity becomes a household word, more and more investors of merely modest wealth want in on the action. Canadian money manager Kensington Capital Partners is ready to play facilitator.
The firm is readying a public offering for a private equity fund of funds that it would operate alongside its privately raised funds. The closed-end fund—“a form of structured mutual fund,” according to one person familiar with it—will be sold only to Canadian investors each able to make a minimum commitment of C$25,000 (US$21,306) in return for 1,250 units. Investors would pay the sum in installments over two years. This appears to be the first Canadian publicly raised fund of funds.
The preliminary prospectus didn’t say how many shares will be offered, or how much the firm plans to raise. Those details will likely turn up in the final prospectus, to be issued this month. CIBC is leading the offering for the shares, which will trade on a Canadian exchange.
Kensington Capital plans to commit between 20 percent and 40 percent of the proceeds in each of the following locales: the United States, Canada and Europe. Another 10 percent would be earmarked for other international markets. Up to 70 percent of the fund will go to buyout funds, up to 20 percent to mezzanine funds, and the balance to venture funds. HarbourVest Partners and Nordea Investment Management AB have been tapped to manage some of the proceeds of the offering through their own funds of funds.
Founded in 1996, Toronto-based Kensington Capital has committed $230 million to private equity funds, generating an 18.3 percent net IRR to date. Its managing directors include Rick Nathan, head of the Canadian Venture Capital Association.
The prospectus for Kensington Capital’s fund details the growth of private equity fundraising, and how private equity firms have outperformed the public markets. It laments how minimum investments in private equity funds are often above $5 million, effectively shutting out small investors.
Due largely to an unfavorable regulatory climate, publicly traded funds of funds have yet to arrive in the United States, although Switzerland-based LGT Capital Partners and several other firms have managed such vehicles for years in Europe.
U.S. and Canadian firms have found other ways to tap the public markets. Fortress Investment Group recently IPO’d its management company. Last year, Kohlberg Kravis Roberts & Co. floated a $5 billion public vehicle on the Amsterdam Stock Exchange to invest in KKR deals alongside its other funds. Canada’s Onex Corp., the largest Canadian buyout firm and one of the largest anywhere, is public. By one estimate, 35 to 40 funds affiliated with private equity one way or another trade publicly around the world.
In the United States, the federal government has shown caution in letting retail investors play in the asset class. The Securities and Exchange Commission has even proposed a rule change that could make it more difficult for wealthy family and friends of buyout firms to invest in parallel co-investment, or sidecar, funds governed under private placement rules. Under the proposed rule change the SEC would require investors to already own $2.5 million in investments when they commit to a private equity fund. The current regulations say they need a net worth of $1 million or salary of at least $200,000.
The protections the government offers to smaller investors are strict for a reason, said Russell Pennoyer, a partner with New York-based placement agent Benedetto Gartland & Co. Even for seasoned investors, he said, “it’s a tough asset class that’s hard to master.”—M.C.