Hycroft, a three-year-old New York investment bank serving both general partners and limited partners, has splashed into the principal investment business, launching a fund earmarked to purchase minority stakes in the management companies of mid-market buyout shops.
Hycroft Capital LP set sail with a $750 million target in January, according to a source familiar with the fund. The effort is still in the early stages; the private-placement memorandum has yet to be finalized.
Leading the fund are Tom Morgan, who joined Hycroft late last year as a managing director following a 15-year career at buyout shop New Mountain Capital; Scott Myers, chairman, CEO and principal owner of Hycroft; and Tom Bratkovich, a San Francisco-based managing director who joined the firm in mid-2014 after serving as a director at advisory shop LP Capital Advisors.
The firm joins a field that, while hardly crowded, has been getting more attention of late as more buyout shops look for ways to monetize their management companies while remaining private.
The former head of the financial-sponsors group at Morgan Stanley, Mark Bradley, plans to raise as much as $1 billion for a debut fund to purchase minority interests in private-equity firms, according to an article in The Wall Street Journal earlier this month.
Dyal Capital Partners, part of Neuberger Berman LLP, has secured at least $1.5 billion toward a $2.5 billion third fund earmarked for minority stakes in private-equity firms. Backing has come from Alaska Permanent Fund Corporation and New Jersey Division of Investment. The firm has taken stakes in Providence Equity Partners and Vista Equity Partners.
Hycroft is giving the strategy its own twist by mainly targeting relatively small buyout firms in North America — those whose latest funds are no more than $2.5 billion to $3 billion, according to our source.
The firm also has an array of other services to offer portfolio companies, which could make it a more attractive partner than rivals. Along with an established fund-placement practice, Hycroft offers buyout firms advice on investor relations, portfolio valuations and fund restructurings.
Goal: Rates of return in mid-to-low 20s
Should public pensions, sovereign-wealth funds and other large investors flock to the fund, the firm plans to take stakes of anywhere from 5 percent to 25 percent in each of 10 to a dozen or so management companies. Hycroft would be entitled to a percentage of the management companies’ cash flows from management fees and carried interest. Its aim would be to generate mid-to-low-20s rates of return.
For the buyout firms the sale of a minority stake would give them cash for any number of purposes — to provide a final payout to retiring partners, seed a new business, make new hires and finance a GP commitment. Down the road Hycroft would look to exit investments by such paths as selling to secondary buyers or to large mutual funds, or by taking firms public. It could also remain a minority partner indefinitely.
To achieve that last option, the partnership would have no fixed lifetime. Investors would have a chance to sell their interests along the way, although the exact mechanism for liquidity has yet to be announced.
Hycroft has grown quickly in its first three years, with a recent batch of hires expected to bring the firm to about 25 employees and nine managing directors in offices in New York, Dallas, London and San Francisco.
Hycroft is in the midst of several placement assignments. Clients include Aldrich Capital Management, a growth-equity firm seeking $250 million for a debut fund; One Equity Partners, the JPMorgan Chase spin-out approaching a first close of $1 billion toward a $1.5 billion target on its latest buyout fund; and Wazee Street Capital Management, a distressed-debt investor expected to wrap up its fourth fund above its $200 million target in coming weeks.
Among its more significant recent hires, the firm this September named Managing Director Neil Horn and Vice President Daniel Neczypor to its fund-placement business. Horn previously served as investor-relations manager at energy specialist First Reserve; Neczypor had been a vice president at placement agency Mercury Capital Advisors. This January the firm said it hired Christopher Cooke as managing director to head its London office and lead its LP advisory practice outside the United States.
The firm has also lost some executives along the way, including Managing Director Neil Banta, who left about a year ago to become head of investor relations at former Hycroft client Albright Capital Management; and Managing Director Loren Boston, who left toward the middle of 2015. Both were on the fund-placement team at Hycroft. I was unable to reach Banta and Boston for comment.
If Hycroft can gain significant traction on its debut fund, expect its pace of hiring to pick up in the months ahead.
Action Item: Learn more about Dyal III from this regulatory filing http://goo.gl/4ws1te
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