Last year, Vision Capital launched a new strategy. The London firm, focused on direct secondaries, had become aware of a need among private equity funds for financing outside their investment periods.
With assets being held longer, “there typically is more capital that is needed later on during the life of the fund,” said Emil Fajersson of the firm’s New York office. “Also, in a market with high valuations, a key driver of returns is the ability to do add-on acquisitions.”
“The constraints of a private equity fund being 10 years with a five-year investment period: That’s what we are trying to solve for. Where there are good value-creation initiatives that can be pursued in year six, seven, eight … that’s where we look to step in.”
The firm calls its lending business principal finance. “In a nutshell,” Fajersson explained, it’s “trying to provide portfolio-wide debt or preferred equity for the fund to use for follow-on investment purposes in its existing portfolio, or to provide liquidity for LPs to use as a bridge to fundraising.”
The financing is intended to be flexible, suitable for supporting “essentially anything that the GP or the fund is constrained from doing, given its capital access.”
For a fund that’s outside its investment period and looking to make an add-on acquisition or delever an asset, a bank loan would be the cheapest option, if available. Or “they could ask for more capital from their LPs, which they often do,” Fajersson said.
But for a later-stage fund, that might be unappealing: “You might be thinking about raising your next fund; you don’t want to dilute those discussions with the LPs.”
If those alternatives aren’t viable, you’re left with getting mezzanine debt or a minority equity investor. “That’s where we can be very competitive,” Fajersson said.
Whereas a mezzanine lender might want a board-observer seat, warrants and time-consuming due diligence, “our instrument is really designed to be very benign. We don’t require any cash interest. We typically don’t require any financial covenants. The maturity of our instruments is tied to the life of the fund. Nothing changes in the arrangement between the management team and the GP, necessarily. Probably more important, nothing changes between the GP and the LPs.”
Transaction sizes are expected to range broadly, from $20 million to $200 million to $300 million. “We prefer to deal with high-quality GPs that have raised a subsequent fund,” Fajersson said, “because that helps with all of the alignments, especially between the GP and the LPs.”
Swedish by background, Fajersson studied finance and accounting at the University of Sydney, then began his career with Macquarie Capital’s infrastructure team in Australia and Hong Kong. The next stop was France, for an MBA at Insead, followed by a stint at UBS’s M&A team in London.
In 2011 he joined Vision, which sent him to the U.S. later that year. The 34-year-old says he loves New York: “I hope to stay here for many years to come.”