- Fund III allows company to spin out assets into special purpose vehicles
- LPs must approve such deals
- Investors can choose to sell their exposure to companies or roll into SPVs
Atlas Holdings, whose latest fund recently closed at $1.67 billion, negotiated an innovative provision letting it hold investments beyond the traditional 10-year life of a private equity fund.
The firm joins a number of fund managers looking for ways to hold companies longer than what is usual in a traditional private equity fund when they believe they can extract more value. Carlyle Group and CVC Capital Partners have raised longer-life funds with terms longer than 10 years.
Atlas took a slightly different approach in that Atlas Capital Resources III has a conventional fund term. However, it includes a provision that allows the GP to buy portfolio companies out of the fund using special purpose vehicles with indefinite hold periods, according to Tim Fazio, co-founder and managing partner at Atlas.
Limited partners in Fund III will get a choice of whether to sell their position in the portfolio company, or roll their equity into the special purpose vehicle, Fazio said.
“We believe we build value in businesses over the long term, and this feature will give us flexibility to do that in circumstances where the company continues to have great prospects,” Fazio said.
Fazio said the new provision harkens back to the firm’s origins, before it raised institutional funds and bought companies on a deal-by-deal basis, he said. “We’ve experienced the benefits of long-term ownership,” he said.
Atlas makes control investments in companies under stress. In the past, it’s acquired corporate orphans, companies in bankruptcy and out of court restructurings.
This strategy lends itself well to longer hold periods at times, Fazio said. “It takes a while to get the ship righted … to kind of get the distress out of the system and get the business running well and build a management team that’s very capable,” he said.
Having the flexibility for longer hold periods can also be attractive to certain sellers who aren’t looking to have their company bought and flipped in a few years, several sources have told Buyouts in the past.
Limited partners have mixed views on the trend of GPs finding ways to hold companies longer. Some believe GPs should stick to the traditional private equity time frame, which requires managers to have discipline in how they manage assets, according to one LP who has explored the long-term hold opportunities.
“There’s something to be said for having a finite period of time to do something with the company that you’re buying,” the LP said.
However, LPs also are committing to longer-life funds. Carlyle Group raised $3.6 billion for its long-life fund in 2016 and Blackstone Group raised $5 billion for fund with a 20-year life last year.
Atlas has not yet started investing Fund III, which sources said has a six-year investment period and charges a premium carried interest. That is similar to Fund II, which charged LPs a 25 percent carry rate as long as it beat a hurdle of a net 2.5x investment multiple, Buyouts previously reported. The firm closed Fund II on $900 million in 2013.
Action Item: Check out Atlas’s Form ADV here: https://bit.ly/2IQJq0z
Photo: The United Launch Alliance (ULA) Atlas V 541 launches the NROL-35 mission for the National Reconnaissance Office (NRO) at the Vandenberg Air Force Base in California December 12, 2014. REUTERS/Gene Blevins