peHub Second Opinion

Today’s Highlights: One FoF’s commitments, which PIKs are P-ing in K, and State Street’s private equity index.

*** You may remember that TowerBrook Capital Partners is raising a fund, according to a report from Buyouts. Among Towerbrook’s past LPs is California Public Employees’ Retirement System, AIG and MetLife. For this fund, they’ve seen interest from Constitution Capital Partners, the Standard Life funds-of-funds spin-out that recently received a $750 million commitment from Universities Superannuation Scheme.

What other funds is Constitution looking at?

-Wind Point Partners, which is targeting $1 billion.
-American Capital Strategies.
-Avista Capital Partners, which is targeting $3 billion. The partners at Constitution have done co-investment deals with Avista in the past.
-Nautic Partners.

*** LBO wire ran a story from Standard & Poor’s last week that looked at a sample of 41 PIK-toggled companies. Most of the sampling is LBO-backed, and only four of the companies are paying in kind. Three of those are PE-backed, one is management-owned, and all have a debt to EBITDA ratio above seven. According to S&P the companies are highly levered thanks to dividend recaps.

The guilty parties:
-National Mentor Inc. owned by Vestar Capital. Vestar bought the company from Madison Dearborn, which took a dividend just over a year before selling.
-U.S. Oncology Corp. owned by Welsh Carson Anderson & Stowe. Currently levered 6.6 times EBITDA thanks to three dividends since its take-private in August 2004.
-Berry Plastics owned by Apollo Management and Graham Partners. The firms extracted their $400 million investment in a recap last year after buying Berry for $2.3 billion in September 2006.
-iPayment, owned by its managers.
-Lastly, though not noted in the report, Apollo Management’s Realogy Corp. is also paying in kind for some of its bonds.

*** All About Alpha picked up the news of State Street’s “private equity replication” model. It’s a benchmarking tool (like an index) for PE funds. The blog argues that such an index would allow for more transparent PE investing and the ability for investors to “short” PE exposure. But I say, isn’t it going to be difficult to build a comprehensive universe of PE funds when information on fund performances is hard to come by? Further, how can you have a daily liquidity index on something with five year lockups?