Golden Gate Closes Bridge

Golden Gate Capital has quietly closed on a $614 million annex fund, which will be used to supplement a $1.8 billion Fund II raised in 2004. The San Francisco-based firm told limited partners of the final close during its annual meeting last Wednesday, according to multiple sources in attendance.

What Golden Gate didn’t tell limited partners, however, was much about how its next non-annex fund will be structured. Specifically, it declined to confirm or deny that the fund will use an “evergreen” structure, as originally reported by peHUB back in January. But that’s why we’ve got moles that go a bit deeper than the general session…

Golden Gate will almost certainly employ an evergreen structure for Fund III, with pre-marketing expected to begin late this year. It also will accept select fund-of-funds as limited partners – contrary to pervasive rumors that it was going to employ a Sequoia-like exclusion strategy. To do so, it will schedule four-year rolling closes that will be workable with the vintage-year strategies of most funds-of-funds.

No word yet on exactly how much Golden Gate plans to raise, but it did tell LPs that it plans to put around $600 million to work per year. Pulling out the back of the envelope, and we find that the Fund III target will likely be approximately $2.4 billion (or perhaps $2.5 billion, since it sounds better). And it will almost certainly be oversubscribed, given that an LP reports that its first fund “has returned 5x with a 67% IRR and still has legs.”

Golden Gate currently has around $900 million in dry powder, which includes $300 million remaining from Fund II and the new annex capital.

If you’re not familiar with evergreen structures, here’s a snippet from what I wrote back in January:

Evergreen structures are highly-unusual in the private equity market, with General Atlantic being the only large firm I know of to employ them. In fact, a number of experienced, non-GGC LPs I spoke with yesterday didn’t even know how they really work. That was too bad, because such an explanation was exactly the reason for my call.But, thankfully, I was able to secure a quick primer from General Atlantic managing director Tom Tinsley. He explains that limited partners (or “capital partners” in GA parlance) commit to General Atlantic at a time of their choosing, so long as the firm agrees to accept them. Right now, most GA money comes from family offices that have committed a minimum of $100 million. The firm then begins deploying the capital, and goes back to its capital partners for additional capacity when needed. For example, General Atlantic last year raised its capital capacity from just under $4 billion to exactly $5 billion, with a little more than half of the increase coming from existing capital partners.

Each new capital partner is permitted to negotiate its own economic terms. But if a capital partner joins in 2003 at more LP-friendly terms than did an LP who joined in 2001, the revised terms will apply going forward to all LPs on an MFN (most favored nation) basis.

The primary upsides of evergreen funds are firm stability and added flexibility in making forward-looking investments in talent and geography. On the flipside, evergreen funds don’t provide as much standardized accountability as to traditional fund structures, and also can be administrative nightmares for the general partner. For example, imagine having to calculate individual clawbacks for each LP, because each of them bought in at a different time.