Emboldened LPs flex their muscles
Cash-strapped or not, limited partners are using the difficult fund-raising environment to try to negotiate better terms in their fund documents.
Earlier this summer, two sets of limited partners separately took action against their general partners. In Munich, buyout fund Nordwind Capital’s investors blocked Nordwind’s deal for a fertility clinic roll-up play, claiming the deal was off-strategy. The firm decided to cancel the deal rather than force the resistant LPs into default. The actions took place in February, but were revealed in late June.
Meanwhile, in the United States, investors in two Citigroup infrastructure funds have voted to ban the funds from making future investments, citing a key-man provision and several failed deals.
These actions, while headline-grabbing, are just a part of the behind-the-scenes LP uprisings as of late. Some of the terms emboldened LPs are requesting include lower management fees, lower or possible “waterfall” carried interest, lower transaction fees, stronger key-man provisions and even possible clawbacks on deals that have produced carried interest for GPs.
New terms helped lead to the demise of West Hill Partners earlier this year. The first-time Boston-based firm, started by former J.W. Childs professionals, was shut down in March thanks to Ontario Municipal Teachers Employees Retirement System. The LP committed $75 million to the fund, which had a $500 million target. When the firm only raised $120 million after about a year, its investors forced the firm to shut down. —Erin GriffithOhio FoF has money to spend
Fort Washington Capital Partners is looking for a few good funds, especially if they’re small.
Recent pledges include Shasta Ventures, an early stage venture firm, ABRY Partners, a PE firm that concentrates on the media, communications and information services sectors, and HIG Bayside, which focuses on distressed investments.
Having raised about $170 million in a tough fund-raising market, the Cincinnati-based fund of funds manager is seeking to invest in funds that can take advantage of distress in the market, such as turnarounds, restructurings and secondaries, says Christopher Baucom, Fort Washington’s managing director of private equity.
Fort Washington held a final closing in May on about $170 million for Fort Washington Private Equity Investors VI, which had targeted $250 million. The firm previously raised $135 million for fund V, which closed in 2006.
The FoF commits to funds of all sizes, going as small as $200 million and as high as $6 billion, but it tends to favor smaller vehicles. The firm usually commits $5 million to $10 million to each of the roughly 25 vehicles housed in its funds of funds.—Nancy GordonFlorida launches $250M tech effort
The Florida State Board of Administration launched the Florida Growth Fund in late June, which will allow it to invest up to 1.5% of the Florida Retirement System Pension Fund’s assets in technology and growth enterprises that have a significant presence in Florida. Sectors of interest include space technology, aerospace and aviation engineering, computer technology, renewable energy, and medical and life sciences.
Investment options available to the LP include venture capital funds, growth capital, mezzanine debt and co-investments. Overall, the Florida Growth Fund will have the ability to invest $250 million of capital.
Hamilton Lane, the limited partner’s private equity adviser, will manage the effort. It plans to open a Florida office to support the project, and it will create a website to field proposal requests and other inquiries. The website, www.floridagrowthfund.com, is currently under construction.
In other news, the state said that it intends to extend its geographic reach, in part, by forming relationships with international managers not currently in the portfolio.
About three-quarters of the private equity portfolio is committed to buyout managers, with the remainder divided evenly between venture capital and special situation. Hamilton Lane said it intends to continue assessing those types of opportunities with top-tier managers in Europe. —Nancy GordonMaryland eyes mezz, secondary funds
The $26 billion Maryland State Retirement and Pension System is considering making pledges to vehicles that concentrate on mezzanine debt, secondaries and perhaps distressed investments.
Robert Burd, managing director of the pension fund, said that Maryland could put about $200 million through the rest of 2009 into funds that invest with those strategies.
So far this year, the limited partner has made $485 million worth of pledges, according to Burd. Mega-buyout firm The Blackstone Group got a slug of $100 million for its sixth fund; buyout shops Yucaipa Cos. and TA Associates each received $50 million commitments for their latest vehicles; and mid-market buyout shop ABS Capital Partners obtained a pledge of $25 million. In the second quarter, ABS Capital closed its sixth fund with $400 million in commitments.
Maryland has also shown an interest in putting money to work overseas. It committed $50 million each to Kohlberg Kravis Roberts & Co.’s latest European fund and to the third fund of Navis Capital Partners, a Malaysia-based buyout firm.
Last year, the state raised its target allocation to private equity from 5% to 15 percent. As of June 30, the actual allocation stood at 3.4 percent. In December, Dean Kenderdine, executive director of the pension fund, said that there was no set pace for reaching the target allocation, and that the process could take “a number of years.” —Nancy GordonNew Hampshire seeks investment director
The New Hampshire Retirement System recently launched a nationwide search for a new director of investments to replace Rick Shafer, who left in May to join the Ohio Public Employees Retirement System as deputy chief investment officer.
The vacant position represents the senior investment role at the pension fund. EFL Associates, an executive search firm, has been retained to conduct the search.
The director of investments provides investment advice to the board and investment committee, serving as the primary staff liaison on investment matters.
Dick Ingram, executive director of the pension fund, said in April the staff is working with New England Pension Consultants to rebalance the portfolio.
“It is worth noting that while we have always had prudent levels of alternative investments in our portfolio; we do not have the serious overhang of non-marketable assets waiting for a markdown that many other public pension funds do,” Ingram said at the time.
The limited partner expects to commit $60 million to private equity this year, including $30 million to secondaries, $20 million to mezzanine and $10 million to distressed investments. —Nancy Gordon
Illinois TRS taps Doehla
The $30 billion Teachers’ Retirement System of Illinois has named Zachary Doehla to serve as its alternative investments officer.
Doehla was set to begin overseeing the private equity portfolio starting on Aug. 17. He previously served as associate director at Orix USA Corp., director at Bridge Finance Group and as a senior financial consultant at Manor Care Inc.
Doehla replaces Lamar Villere, formerly the senior alternative investments officer, who left in February to helm the Tennessee Consolidated Retirement System’s private equity program.
A new asset allocation plan approved in May increased the state pension fund’s long-term target for private equity to 10% from 8 percent. As of May 31, Illinois TRS had $2.5 billion invested in private equity, or roughly 8% of the fund’s total assets. —Nancy Gordon
OPERS names interim CIO
The Ohio Public Employees Retirement System has appointed Richard Shafer as its interim chief investment officer. Shafer had been serving since May as the pension fund’s deputy director of investments.
Shafer joined the pension fund in late May as deputy director of investments, with primary responsibility for the development and execution of the investment strategies for private equity and real estate. Previously, Shafer was the director of investments for the New Hampshire Retirement System and the CIO of Alaska Permanent Fund Corp.
Former CIO Jennifer Hom resigned on June 4 for personal reasons. Hom joined the pension fund in 2002 as the system’s fixed income portfolio manager and was named CIO in 2005.
With assets of $60.5 billion, OPERS is the 12th largest U.S. public pension fund.
Almost 80% of its private equity portfolio is committed to buyout funds, with the rest earmarked for venture capital and special situations. —Nancy Gordon
Ohio LP to pledge up to $250M
The School Employees Retirement System of Ohio said it plans to commit between $150 million and $250 million to private equity partnerships in its fiscal year 2010, which began on July 1.
The limited partner said the pledges would go mostly to buyout funds, although the staff will continue to explore international and special situation funds, such as energy, secondary and distressed debt vehicles, as well as co-investment opportunities.
The LP’s private equity program has a 10% target allocation, with a range of 5% to 15 percent. As of May 31, the actual allocation to private equity was 7.8%, according to pension spokesperson Tim Barbour. —Nancy Gordon