Ex-KKR Pros Offer Rather LP-Friendly Fund Terms

While all for aligning their interests with those of limited partners, buyout pros will have to hope the exceptionally LP-friendly partnership terms offered by Public Pension Capital Management don’t spread too broadly. Then again, most funds don’t present investors with quite the risks this particular debut offering does.

At its mid-September meeting the Oregon Investment Council, which manages the roughly $59 billion Oregon Public Employees Retirement Fund, conditionally approved a $100 million commitment to Public Pension Capital LP, an evergreen fund with an initial $500 million target.

Launched by two former investment professionals at Kohlberg Kravis Roberts & Co., Perry Golkin and Michael Tokarz (also chairman and portfolio head of business development company MVC Capital), the firm plans to pursue a generalist strategy, acquiring or taking minority stakes in small to mid-sized companies in such industries as consumer products, energy, financial services, health care, industrials and specialty chemicals. Through a spokesman Tokarz declined a request for an interview, while I was unable to reach Golkin for comment.

The state’s commitment is contingent on Public Pension Capital securing at least $500 million in total commitments within a year, according to a document presented at the Oregon Investment Council meeting; the firm’s aim, the document says, is to try to line up four more commitments of $100 million each from other “prominent public pension funds.” The proposed terms suggest that Golkin and Tokarz want LPs to feel they are getting a far better deal than they can with other buyout shops.

“I’ve known them for a long time,” said Jay Fewel, senior investment officer in charge of private equity for the pension fund, referring to Golkin and Tokarz. “They’re very well connected, very sharp. What they’re proposing is not without risk by any means.” But, he added, “We felt if they’re able to execute, from an economic perspective it’s potentially attractive. Time will tell.”

Here is a quick breakdown of the major terms:

* The firm would have an annual operating budget determined by an advisory board comprising members of the initial investors in the fund; the budget, in turn, would determine annual management fees. Fewel said he expected the average management fee over the first five years to be about 1 percent.

* The investment professionals would collect a carried interest after returning management fees and generating a preferred return of 4 percent for investors. After that the carried interest would be 5 percent for producing an “annually compounded rate of return between 4 percent and 8 percent,” according to the document, and 10 percent for producing a return above 8 percent. It’s not clear if there would be catch-ups.

* The firm anticipates holding an initial closing on March 31, 2013; under its proposed evergreen structure the fund would open to new investors every year on that date, as well as allow prior investors to add more to the pot. Investors must commit to a three-year lock-up of capital, after which they can choose not to have any more money drawn down should there be undrawn commitments.

* In addition to approving the annual operating budget, the advisory board would have especially strong governance rights, including the ability to fire and replace Golkin as CEO.

* Should active capital commitments fall below $500 million, the Oregon pension fund would not have to fund fees or capital calls until the board approves a new operating budget; the pension fund could also decline to make future capital calls without penalty.

Will LPs besides the Oregon pension fund go for it?…

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