Hedge Fund Investor, Merchant Bank Team Up to Hunt Zombie Funds

In what could the start of a trend to free up an estimated $100 billion trapped in U.S. buyout shop funds with little hope of raising fresh cash, an Alabama-based merchant bank and a Texas hedge fund investor with roots to the oil fortune of Perry R. Bass announced plans to form Crestline-Kirchner Private Equity Group.

W.B. (Bud) Kirchner, the founder of 28-year-old Kirchner Group, a Birmingham, Ala.-based bank with a specialty in working with portfolio companies and limited partners in the buyout world, will head up the new firm.  But most of the staffing and capital for the venture will come from Ft. Worth, Texas-based Crestline Investors Inc.

Crestline will group the new zombie business under $1.9 billion in capital allocated under its “opportunistic investments” umbrella. Those investments include its role in the secondary hedge fund market of providing liquidity to investors in exchange for their stakes in funds. All told, 16-year-old Crestline currently  handles $7.3 billion as a leading alternative asset management firm.

Kirchner Group has made a name for itself as a specialist in zombie deals. It took over management of the Brantley Partners V LP from Brantley Partners and renamed it Emerald Partners V LP fund, which it continues to run.

“This is for us an ongoing business model,” said Paul Choy, managing director of Kirchner Group. “We replace or complement the GP in underperforming funds, turn them around on behalf of the LPs, accelerate return of capital, and recover value within the portfolio. With the joint venture with the Crestline Investors, we are accelerating and expanding that program.”

And not a moment too soon. Demand for these types of services may increase not only in the U.S. but in Europe. LPs are looking for ways to shore up their positions in ailing private equity funds that fell victim to the 2008-2009 financial crisis and other woes.

In another example of a new zombie specialist, Zurich-based Evoco Ltd. has marked its one year anniversary after moving into the space on the other side of the Atlantic.  Michel Galeazzi, a partner at Evoco, came into the category after working at HgCapital, 3i Group PLC and UBS.

“We are a general partner — we can work with the company’s management team, sit on the board, do the heavily lifting,” he said in a phone interview.  “There’s a huge need for a GP who can work with a distressed fund and a distressed portfolio in Europe.”

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