The $8.1 billion vehicle has maxed out on the permitted annual percentage of secondary sales for 2009 and is waitlisting all interested sellers until 2010, according to a source familiar with the situation. The fund closed in December 2007 alongside a $2 billion co-investment vehicle, but plenty of it had been deployed prior to the final close.
THL Partners Fund VI includes such mega-deals as Univision, Clear Channel and Ceridian. Given the well-publicized troubles of some of these companies (ahem, Clear Channel), it’s no surprise that some investors are running for the door.
The problem, of course, lies in a set of “draconian” regulations, which state (in over-simplified terms) that if more than 2% of a fund’s LP stakes trade on the secondary market in a calendar year, the fund could be audited and deemed a publicly-traded partnership, or PTP. The PE fund then is no longer a flow-through vehicle and, as a result, end up having its returns taxed twice (GPs get taxed on the income, LPs get taxed on it after distributions). There also are safe harbors for up to 10% if it is sold in large “block transfers;” ultimately this relates to how many LPs there are. That percentage can be increased to 10% if the trading is done on through qualified matching service, or QMS, like NYPPEX. A general partner has to approve any sale of its limited partnership stakes, and in THL’s case, the GP has told investors to hold off until next year.
THL’s Scott Sperling didn’t return calls for comment.
The max-out problem isn’t unique to THL Partners Fund VI. Given the level of distress dire liquidity crunch facing some limited partners, there are countless other buyout funds in the same situation. For example, last year Bain Capital Fund IX, which purchased Clear Channel alongside THL, ran into the same issue, a source said.
In March, NYPPEX managing partner Larry Allen estimated 20% of all buyout funds had hit their 2% target for the year. He predicted half of all funds would hit it by June. I’ll go ahead and say that I’m guessing those predictions were made when everyone still expected a very active secondary market. Those expectations have quelled given the lack of secondary activity this year. Thanks to hardly any capital calls, sellers haven’t been as desperate to exit their positions and the bid-ask spread remains high. Notably, many secondary players maintain that a windfall of activity is right around the corner, just as they’ve been predicting since January.
The lack of secondary activity probably means that Allen’s prediction is a bit high, but I would not be surprised if more buyout firms have set up their own captive QMS services to assist distressed LPs in selling their shares and raise the amount of permitted sales from 2% to 10%. Meanwhile, LPs seeking to get out may try doing so through synthetic transfers, which can be structured like a joint venture.