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Editor’s Letter: Look for large U.S. fund restructurings in 2018

A recent deal may be instructive in showing how restructurings can help GPs regain momentum after some down years.

J.W. Childs Associates was one of the early GPs to restructure an older fund, cashing out existing LPs and moving remaining investments from its 2002 vintage third fund into a new vehicle capitalized by new investors Canada Pension Plan Investment Board and Goldman Sachs.

That deal, which completed in 2014, also included fresh capital from CPPIB into the firm’s fourth fund, which targeted $450 million. It’s not clear how much Fund IV closed on.

Now the firm is back in market with Fund V, targeting $500 million. The fundraising represents much smaller ambitions for the firm, which closed Fund III on $1.75 billion. It will be interesting, however, to see how the fundraising goes. After the restructuring process, J.W. Childs continued investing in new deals and building up a more recent track record.

“We are in business, we have a new fund. …We are very much in the private equity business,” Partner Adam Suttin told Buyouts in 2015. “We are actively investing our fourth fund and managing the portfolio.”

Restructuring processes have become much more routine in today’s environment than even in 2014, when the market still viewed them as almost traumatic experiences. Today, such processes have become simply one more tool a GP can use to cash out LPs who want liquidity and extend the life of a fund to allow more time to find an exit for certain investments.

Several processes wrapped up toward the end of the year, including fund restructurings by Vector Capital, Eos Partners and Quadriga Capital. Others in the market in 2017 included restructurings by Monitor Clipper and Peru-based Enfoca.

Along with pure restructurings, which give existing LPs the option to cash out, or roll with the GP into a newly created vehicle used to house remaining investments, managers have used other creative methods in the secondary market. Warburg Pincus sold a strip of Asian assets out of its 11th flagship fund into a new vehicle capitalized by Lexington Partners, Goldman Sachs and other investors that reduced exposure to Asian companies in the fund.

Such processes are big money for intermediaries, and so most secondary advisers have built up their businesses targeting this type of strategy. GP-led processes are helping drive volume in the secondary market, and most secondary intermediaries will tell you they have become their biggest focus, as compared to more traditional LP stake sales.

Look for some headline-making restructurings in 2018 as more mainstream firms look for creative ways to cash out older investors, or even move certain investments out of flagship funds into side vehicles.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky