As we reported yesterday, Sun Capital’s investor advisory board approached the firm about reducing the size of its fifth fund. Those talks are in very early stages with nothing agreed-upon yet, but today a source revealed a few more details.
Investors are seeking a fund cut of approximately 25% of remaining capital, peHUB has learned. As reported, the $6 billion fund has $4.44 billion remaining, so, the size cut would be approximately $1.11 billion.
The source said Sun Capital’s founders, Rodger Krouse and and Marc Leder, have been receptive to the idea of a reduction and are working on a solution with the investors. However, Sun Capital’s fee structure may complicate things.
Currently the firm uses a “fee roll,” in which fees from deals and funds cover its partners’ contributions to the fund. Since the firm isn’t doing many deals these days (no one is), it’s been more difficult to make ends meet on anything from capital calls to salaries. If the fund size reduction comes from the general partner contribution, it would relieve Sun Capital from its capital calls and free up some capital to keep its talent in place. Whether limited partners are okay with that move is unclear.
The other issue with reducing the fund size is how it will affect the fund’s return. Reducing the capital by one fourth gives Sun Capital less room to make up for bad investments. The fund is already underwater by at least $500 million, the source said.
There are plenty of funds which I consider candidates for fund size reductions (*cough* Apollo), but Sun Capital is certainly the easiest target. Last time we checked, the firm’s two largest deals had been written down the zero (Mark IV is bankrupt, Kellwood narrowly avoided that fate last month by negotiating to defer a payment to lenders). The company’s total bankruptcy count for the past 18 months is higher than any other firm, both on volume and as a percentage (seven this year, five last year). The firm is using money from its latest fund to prop up its prior fund. And then there’s that angry, seven-page letter. Investors are not happy.