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Sun Capital to allow LPs in Fund VI to cash out in secondary process

  • Whitehorse and HarbourVest line up as buyers
  • Sun is in market with its seventh fund
  • Fund VI is generating net IRR of about 42 pct

Sun Capital Partners is running a process on its sixth fund that would allow existing investors in the fund to cash out of their stakes, three sources told Buyouts.

At least two buyers are lined up as part of the deal, known as a tender offer: Whitehorse Liquidity Solutions and HarbourVest Partners.

Evercore is working as secondary adviser on the deal. Pricing and the total value of the deal are not clear. It’s also not clear if Sun Capital is looking for a slug of fresh capital (also known as a “staple”) from the buyers for Fund VII, which is in the market targeting $2.2 billion.

Sun Capital, which invests in profitable companies to take them from “good to great,” carve-outs and turnarounds, closed its sixth fund on $2.1 billion in 2014. That fund generated a 41.96 percent net internal rate of return and a 1.61x total value multiple as of Dec. 31, 2018, according to performance information from Regents of the University of California. A person with knowledge of the firm said gross IRR for Fund VI is north of 65 percent.

The firm raised about $1.8 billion for Fund VII as of January, according to a Form D filing.

Sun had a big exit at the end of 2017 from Fund VI, when it sold Aclara Technologies after a three-year hold. Sun acquired Aclara in 2014 for $130 million and sold it for $1.1 billion to Hubbell Power Systems.

The firm raised $6 billion for its fifth fund in 2007. That total was reduced to $5 billion amid losses during the Global Financial Crisis in 2008. Fund V produced a 4.16 percent IRR and a 1.22x multiple as of Sept. 30, 2018, according to performance information from Aon Hewitt Investment Consulting, prepared for the Nebraska Investment Council.

Tender offers are generally simple processes. A GP lines up a buyer or buyers who set a price, and then the offer is made to LPs, who simply decide to sell or not to sell.

The challenge for GPs running such processes is to get enough selling LPs to make the transaction worth it for buyers. Buyers usually want to see a certain minimum number of selling LPs in order to proceed with the deal.

Tender offers represented about half of the GP-led secondary deals last year, which accounted for about 28 percent of $72 billion of total volume, according to Evercore’s full-year 2018 secondary deal activity report. The balance of GP-led transactions were fund restructurings and other types of direct secondary deals.

Within tender processes, 61 percent of LPs chose to hold their stakes, while 39 percent chose to sell last year, Evercore found.

Update: This report has been updated with more description of Sun Capital’s strategy.

Action Item: See Sun Capital’s Form ADV here: