Private equity takes an evolutionary step with alts managers

The business of private equity firms taking minority stakes in alternative investment firms is only a few years old but if one recent deal is any guide, the strategy is already evolving. The opportunity set is expected to expand further as more firms sell minority interests in their general partnerships to finance growth.

One example of the evolution is the May 27 transaction concerning alternative investment firm Clearlake Capital Group LP, which sold a more-than 20% passive stake to three firms — Neuberger Berman's Dyal Capital Partners, Goldman Sachs Group's Petershill Group and secondary alternative investments firm Landmark Partners — to expand the firm's lineup of investment strategies. This is the first club deal in a private equity firm in the sector.

Alternative investment firms Apollo Global Management and Ares Management provide "blueprints" for the type of growth Clearlake Capital executives have in mind, said Jose E. Feliciano, Clearlake's co-founder and managing partner in an interview.

"The attraction of raising permanent capital is to fill out the spectrum" of investment strategies the firm would like to offer, he said. The next step for Clearlake could be a senior performing credit fund, he said.

The firm already offers a buyout fund and a separate, opportunity fund that makes minority investments in companies.

The capital infusion also would allow the general partnership to increase its commitment to future funds, Mr. Feliciano said. However, Clearlake executives don't have a target commitment.

"Traditionally, we have invested about 2%" of the total fund commitment, Mr. Feliciano said. "We would like to do better than that, if we can."

Taking in outside capital is not new for Clearlake, he said.

"From the very beginning we have always had a partner," Mr. Feliciano said.

Originally, Clearlake partnered with money manager Reservoir Capital Group LLC, which held a more than 20% passive stake in the firm. Less than two years ago, Clearlake's co-founders, Mr. Feliciano and Behdad Eghbali, brought in Landmark, which helped finance a recapitalization that helped the founders buy back Reservoir's GP interest.

"Seventy-five percent-plus of the remaining stake in Clearlake is owned by the founders," Mr. Feliciano said.

Now, Landmark is increasing its interest in Clearlake by providing financing and owning a stake alongside Dyal and Petershill.

"They all bring different strengths," Mr. Feliciano said about the firms. "Dyal has an extensive business services platform with an a la carte menu where we can focus on fundraising or the human capital end of our business."

Petershill can bring a lot to the franchise as well, Mr. Feliciano said. For example, many alternative investment firms have credit facilities.

"Goldman Sachs is the leading provider of credit facilities and they are a natural candidate to ... provide insights," he said.

It's those services and relationships offered by the firms, other than providing capital, "that will be tested in the next months and years," he said.

However, Clearlake doesn't appear to have had that much trouble raising capital. In March, Clearlake closed its latest private equity fund, Clearlake Capital Partners V, with more than $3.6 billion in commitments, reaching its hard cap and more than double its prior fund.

Investors in the latest fund include:

• the $352.8 billion California Public Employees' Retirement System, Sacramento;


• $151.4 billion Teacher Retirement System of Texas, Austin;


• $64.5 billion Alaska Permanent Fund Corp., Juneau;


• $56 billion Pennsylvania Public School Employees' Retirement System, Harrisburg;


• $51.9 billion Maryland State Retirement & Pension System, Baltimore;


• $34.2 billion Connecticut Retirement Plans & Trust Funds, Hartford;


• $24.2 billion San Francisco City & County Employees' Retirement System;


• $22.9 billion Los Angeles Fire & Police Pension System; and


• the $2.3 billion Houston Municipal Employees Pension System.

Landmark Partners executives have been employing a financing strategy to help alternative investment firm founders grow or transition their firms to the next generation. Over the past 2 1/2 years, Landmark has invested $2.5 billion in structured growth capital with firms like Clearlake, said Ian H. Charles, partner in Landmark's Dallas office.

"We partnered with them (Clearlake) to buy equity in their firm from their original seed investor," Mr. Charles noted. "We are a silent partner with a unique financing solution that lets managers grow their business. We repeated our partnership with Clearlake at a bigger scale and as part of our structured solution, we also elected to also participate in the minority stake transaction."

Landmark doesn't typically also take minority stakes. Fund managers that buy minority stakes purchase an interest in the firm's profits and carried interest forever, Mr. Charles explained.

"We (typically) partner with managers that want to grow and we do it in a structure that is temporary (and) highly aligned with the manager's investors ... so that the next generation views Landmark as a thoughtful solutions provider," Mr. Charles said.

Petershill and Dyal both offer what they call permanent capital funds; that structure means neither firm will ever have to exit. However, documents concerning its investment in two of Dyal's funds by the New Jersey Division of Investment, Trenton, for the $76.7 billion New Jersey Pension Fund show each fund has a five-year investment period.

Alexander Samuelson, Neuberger Berman spokesman declined comment.

Petershill executives said their funds are permanent capital or evergreen, which is the standard for the sector.

Ali Raissi, New York-based managing director, co-head alternative investments and manager selection at Petershill, said in an interview that firm executives are not waiting for an exit event.

While the firm doesn't have to exit, it has exited portfolio companies over time. Petershill raised its first fund in 2007.

Some portfolio companies have been bought by other money managers and "we could also choose to take the portfolio of minority interest public," Mr. Raissi said.

While sources said that Dyal's next investments will most probably not be club deals, there could be more in the sector in the future.

But having more than one investor involved in a deal could present problems, industry insiders said.

"It's challenging to be owned by multiple owners. We've invested on occasion with multiple outside owners and always found it to be more complicated," said Charles B. Burkhart Jr., founder of private equity firm Rosemont Investment Partners LLC, West Conshohocken, Pa., which takes GP stakes in alternative investment firms. "Even with relatively passive minority stakes, multiple owners means multiple agendas."

Rosemont recently announced it was shifting from private equity to permanent capital by creating a Rosemont Investment Group, which will be a unit of Markel Ventures, an arm of Markel Corp. that makes permanent investments in companies outside of the insurance industry. The new company will be majority-owned by Markel and minority-owned by Mr. Burkhart. The new structure will ensure that Rosemont will not need to exit its investments, he said.