Investors are starting to see the emergence of end-of-life solutions for the zombie funds that are plaguing their alternative investment portfolios.
Researcher Preqin estimates there are 1,200 private equity zombie funds — funds that are practically dead but still collect management fees — in investor portfolios worldwide with total unrealized assets of about $117 billion.
Until recently, these funds have been thought impossible to kill. Still holding some portfolio companies, they require a consensus of limited partners to end them. But investors are banding together with private equity firms that invest on the secondary market to create ways to send these zombie funds to the grave.
Some of the new end-of-life deals include buying out the holdings of investors that want out and creating a new fund, with the same holdings, for investors that want to let it ride.
Late last year, Chicago-based private equity firm Willis Stein & Partners restructured its third fund with capital from private equity firms Landmark Partners, Vision Capital LLP and Pinebridge Investments. That deal, which was brokered by secondary market intermediary Cogent Partners, allowed limited partners to either cash out or let their investment in the remaining portfolio companies live on in a new fund managed by Willis Stein and Vision Capital.
Behrman Capital, New York, did pretty much the same thing, creating a fund for the remains of a $750 million private equity fund it raised in 2000. Investors were given the option to cash out or continue investing in the new fund.
Dallas-based HM Capital Partners' zombie condition was rectified a different way. In May, two HM Capital executives — with the assistance of Landmark Partners — took $425 million in energy assets previously in the HM Capital Sector Performance Fund LP and launched a new firm, Tailwater Capital LLC, also based in Dallas.
HM Capital Sector Performance Fund LP was a buyout fund targeting companies in the energy, food and media sectors in North America, according to a 2007 investment report by Los Angeles City Employees' Retirement System, limited partner in the fund.
In March, other HM Capital executives formed a new firm, Kainos Capital LLC, with the food assets from the same HM Capital fund. The C$172.6 billion Canada Pension Plan Investment Board, Toronto, financed the acquisition for US$468 million. CPPIB also committed US$138 million to a new Kainos Capital fund.
HM Capital, which was the latest iteration of old-line private equity firm Hicks, Muse, Tate & Furst, no longer exists.