Sir Ernest Shackleton offered only “small wages” to the men who joined him in his 1914 expedition to cross the frozen continent of Antartica. Now the private equity firm named after the famed explorer wants to do far better for the investors that sign on for its journey of acquisition.
Financial terms of buyout partnerships continue to evolve, but institutional investors still largely expect to pay in the neighborhood of a 2 percent management fee, along with a 20 percent carried interest after a preferred return of 8 percent. Shackleton Equity Partners, a Los Angeles shop that at press time had completed three transactions on a deal by deal basis, wants to throw that playbook out the window with its first traditional fund.
According to Managing Partner Nick Desai, the firm is proposing to charge no management fee. To pay operational costs the firm would instead keep 100 percent of transaction, monitoring and related fees. The idea is to make sure the firm watches expenses, and that the partners stay hungry to produce profits for themselves and backers.
As for the share of profits, Shackleton Equity plans to charge a carried interest of just 10 percent after a preferred return of 8 percent, with no catch-up. Only if the firm can achieve a 25 percent net IRR on the fund as a whole would the carried interest ratchet up to 50 percent, again with no catch-up. Desai said that investors would do better under this method of divvying up profits until the firm crossed a mid-50s IRR.
Shackleton Equity also plans to break with tradition by asking for only a two-year investment period, rather than the standard five years. Desai said that investors shouldn’t have to wait five years before getting the option to say yes or no to more capital calls. “One of the most important ingredients for long term success is a proper alignment of incentives,” wrote Managing Partner Mark Schelbert in an e-mailed statement. “The cornerstone of Shackleton’s philosophy is that structure drives behavior.”
Potential investors will get a chance to respond to the proposed terms starting this month, when the firm plans to set out to raise $40 million to $50 million for its maiden fund. The firm would like to wrap up the fund by the end of the year, possibly with the help of a placement agent, said Desai.
Whether the firm gets to the finish line in a still-frigid fundraising market remains to be seen, but investors are likely to greet the innovative terms warmly. One of the biggest pet peeves of investors, for example, have been management fees that are so high as to enable fund managers to grow wealthy no matter how their investments perform.
Formed in late 2008, Shackleton Equity acquires companies in software, technology, manufacturing and other fields generating revenues of $5 million to $75 million. Its specialties include complex carve-outs of underperforming businesses from corporations, as well as acquisitions of businesses out of bankruptcy.
The firm has two partners, two associates and two operational advisers. Managing Partner Desai, who previously was a partner and managing director at FocalPoint Partners, a Los Angeles investment bank, has responsibility for fundraising, deal sourcing and deal execution. Sharing the same duties is fellow Managing Partner Schelbert, who previously was CEO of several companies, including a national marketing company, an online medical equipment retailer, and a health care information portal.
Shackleton Equity has made three acquisitions using money supplied in part from wealthy investors and family offices. In March 2009 the firm acquired CyberGlove Systems, a provider of virtual reality hardware and software. In October of that year the firm acquired SafeHarbor Technology Corporation, a provider of customer-service software; and this March the firm acquired Excel Meridian Data, a provider of computer data storage equipment used in education, gaming , government and other industries. At press time the firm said it was close to signing its fourth transaction. Desai said that the firm has already crossed the 25 percent net IRR threshold on its first two transactions by using cash flow generated by the companies to return all investor capital within a year.
We at Buyouts plan to keep a close eye on Shackleton Equity’s fundraising progress. A successful offering would suggest that other emerging managers, if not all buyout shops, might be well-served by proposing far more LP-friendly terms to potential investors.