TH Lee Partners offers choice of deal-by-deal, European-style carry in new fund

  • Fund VIII, targeting $3 bln, has two classes of LP interest
  • Class A and B differ on profit distribution timing, hurdle rate
  • Structure has been used by GPs to retain younger talent

Thomas H. Lee Partners is offering investors in its next fund a choice of either deal-by-deal or European-style carried interest distribution in its eighth fund, pension documents say.

The firm recently returned to market with Thomas H. Lee Equity Fund VIII, targeting $3 billion, about one year after closing its previous vehicle with $2.6 billion. TH Lee employees are expected to commit at least $150 million.

The fund features Class A and Class B limited partner interests, with different distributions of profits and preferred rates of return, according to Minnesota State Board of Investment documents.

Class A interests are a modified American-style waterfall in which the GP can collect carried interest on each realized investment after an 8 percent hurdle has been cleared. For Class B LPs, the GP must pay back all contributions plus a 5 percent preferred return before it can start to collect carry.

The GP’s carry share in both structures is 20 percent. Fund VIII is charging a 1.5 percent management fee during the investment period, which steps down after.

Such a dual distribution structure has been used in the past, for instance by Apax Partners, as a way of retaining younger talent. Investment professionals don’t have to wait until the end of the fund life under deal-by-deal compensation. In the past, LPs who committed under the deal-by-deal structure got a break on management fees. It’s not clear if that’s the case with the TH Lee fund.

Based in Boston, TH Lee acquires middle-market North American companies, targeting business and financial services, consumer and retail, healthcare and media/technology. The firm was founded in 1974 by Thomas Lee and is currently led by co-presidents Tony DiNovi and Scott Sperling. Todd Abbrecht was named head of private equity earlier this year.

Action Item: Check out Thomas H. Lee Equity Fund VIII’s Form D filing here.

Scott Sperling, Co-President of Thomas H. Lee Partners (THL), speaks at the Reuters Private Equity and Hedge Funds Summit in New York, March 2, 2010. REUTERS/Brendan McDermid