Harvard, Columbia and University of Virginia don’t get to have all the fun. There’s another type of secondary sellers: Feeder funds. Plenty of the bulge bracket investment banks manage private equity funds-of-funds for their wealthy client investors, and those clients want out of their commitments.
JP Morgan is one name rumored to be shopping a number of interests in private equity feeder funds. Lehman Brothers Neuberger Berman, is another. Lehman’s fund management business and its wealth management businesses are actually owned by different entities now—Neuberger manages the feeder funds, but Barclays has the wealth management operation.
I’m sure there are plenty more bank-backed feeder funds testing the secondary market. One class of investor more strapped for cash than pension funds and endowments is the rich folk, known for being one of the more volatile pools of investment capital.
Structurally, the feeder funds aren’t unlike the Madoff feeder funds we’ve been hearing about. (Legitimacy-wise, a world of difference…) They’re created to give wealthy individual investors access to the brand name mega-cap buyout funds that have high minimum investment requirements. Bringing Blackstone to the masses in bite-size LP stakes (with a nice layer of fees to boot).
From my understanding, the ones in the market are typically around $100 million in size and committed to a single mega-fund—the Apollos, Carlyles, KKRs and Blackstones. By my understanding, these funds-of-funds make their commitments with money from the bank in anticipation of interest from its wealthy individual investors. I’m not sure if the banks are then on the hook for the investments if no clients show an interest.
But filling pre-committed feeder funds isn’t their biggest problem right now. If what I’m hearing about market appetite is right, unloading off those unwanted mega-fund interests is no easy task.