It was said that the sun never set on the British Empire during the days of old when the military power of Great Britain reigned supreme. The partners of Pantheon Ventures are far from colonial conquerors, but it’s safe to say that the sun never sets on a Pantheon limited partner. The firm announced the closing of its latest fund, Pantheon Global Secondary Fund II (PGSF II), with $900 million from LPs in every corner of the globe.
About half of the fund’s capital comes from LPs in Europe, 30% from North America and the rest from investors in Asia and Australia.
More than 80% of the funding comes from pension plans both public and private, with endowments and foundations making up most of the remaining 20 percent.
Limited partners in the new secondary fund include Bullshead D, the Federal Express Corp. Employees Pension Plan Trust and the University Retirement System of Illinois, according to documents the firm filed with the Securities & Exchange Commission.
Bullshead, which is represented by JPMorgan Chase Bank, put $75 million into the new secondary fund, while the FedEx pension fund invested $35.2 million and the Illinois retirement system chipped in $25 million, according to the SEC document.
This year marks the first time since 1990 that the Illinois retirement system has invested in a dedicated secondary fund. In addition to the Pantheon vehicle, the system also invested in a fund being raised by Adams Street Partners, according to Pantheon CIO John Krimmel. The Illinois retirement system avoided investing in secondary funds over the past decade, citing unattractive valuations.
The firm, which has headquarters in London and San Francisco, had an initial goal of raising $600 million (see PEW, October 27, 2003). A Pantheon spokesperson said that the oversubscribed fund took less than nine months to raise. The firm took a break from fund-raising when London-based Russell Investment Group acquired it earlier this year.
Partner Jay Pierrepont says that the size of the fund reflects the firm’s caution.
“The secondary market is strong, but there’s quite a lot of money that’s being raised,” he says. Pantheon could have raised well over $900 million, Pierrepont says, but the firm decided against it.
Pierrepont describes the new fund’s fee and carry structure as “lower market” but says that the firm did raise its fees from its previous secondary fund level. He says that the change reflects the current market and comes with the firm having proven its credibility as a secondary buyer.
So far the fund has closed on one deal and has a letter of intent pending for another transaction. Both are described as middle market transactions of under $60 million.
Pantheon avoided doing venture deals through much of the life of its first secondary fund, which closed in 2000 with $418 million.
Pantheon, founded in 1982, was acquired earlier this year by the Russell Investment Group for an undisclosed amount. Pantheon retained its name, private equity investment focus and all of its staff. It now acts as Russell’s private equity services branch.
Pantheon hired additional employees during its fund-raising and it now has a staff of 70 with 38 investment professionals. The firm has committed more than $1.3 billion to secondary deals since 1987.
Symmetry Isn’t Afraid of Venture Assets
Larry Wonnacott and Marshall Greenwald have been investing in private equity since the late 1980s. They started working together at Kemper Financial Services. Several acquisitions later, they left Deutsche Bank Asset Management in early 2003 and soon formed Symmetry Investment Advisors.
The Chicago-based firm provides strategic private equity advisory services to institutional investors. Like other strategic advisors, the firm decided it could fill a niche in the secondary market and raised a $70 million secondary fund, the Symmetry Secondary Fund 2004. Limited partners in the fund include funds-of-funds that Wonnacott describes as “more enlightened gatekeeper entities,” as well as other institutional investors.
Unlike most groups raising a secondary fund, the principals of Symmetry found their deal first and then set out to raise money. Most secondary buyers raise a fund and then find potential purchases, often making the first few deals while a fund is being raised. Symmetry has already purchased the private equity portfolio of a financial services firm. The seller was a group with which Greenwald and Wonnacott had a working relationship.
The portfolio is a mix of buyout, mezzanine and venture capital partnerships. While most of the capital in the fund is invested in buyout deals, more of the partnerships in the portfolio are venture capital partnerships. Symmetry’s willingness to take on VC assets sets it apart from many other secondary buyers, who have recoiled from venture assets during the last few years. “Most of the secondary funds are not interested in a venture portfolio,” Wonnacott says. “That’s one reason the seller worked with us is that we’re comfortable with venture capital.”
He says that despite some renewed interest on the part of firms like Credit Suisse First Boston (see VCJ, August 2004) and others, the secondary bias in favor of buyout funds will likely continue. “Everybody wants the big dollars and easy evaluations, and those are in buyouts,” he says. “It’s much easier to value a company with positive cash flow than it is to spot the value in a startup. That’s why the bias is there and why the bias will stay there. Groups with a heavy venture portfolios will still have problems on the secondary market because the interest isn’t there.”
A growing number of advisory firms are becoming active secondary buyers. For example, Allen Capital Partners, an affiliate of the New York Private Placement Network (NYPPE), is seeking $250 million to acquire private equity limited partnership interests for Allen Capital Partners X. Also, Morning Street Partners, an affiliate of the New York-based secondary advisory firm Columbia Strategy, is raising a fund.
Auda Advisor Comes In $10M Above Target
While the giants in the secondary business continue to raise larger funds and compete to put those funds to work, one veteran of two of the secondary world’s giants is making smaller investments in a private equity firm that is new to the secondary sector. Richard Lichter, a former director at Landmark Partners and one of the founders of Lexington Partners, had an extra reason to celebrate this summer. His new firm, Auda Advisor Associates, made a final close on its inaugural secondary fund with $410 million.
The fund, Auda Secondary Fund, was oversubscribed and closed with $10 million more than its target. It had a first close of $133 million last August. Limited partners in the fund include the 3i Pension Fund, New York Life Insurance, MetLife, SunAmerica and the government of Sweden’s AP3 investment fund. The firm did not disclose any information on the fund’s fee or carry structure, except to say that its terms are “very standard.”
Lichter expects that approximately 75% of the fund’s buys will be for U.S. buyout assets. The remaining 25% will be in European buyouts, U.S. venture and U.S. mezzanine deals. The fund is open to buying assets that are fully funded or not funded at all.
The firm can invest between $5 million and $75 million per transaction, but will likely invest an average of $15 million per deal. Auda has closed on or has contracts to close on deals comprising about $100 million from the fund. So far, these deals have been mostly for buyout assets. Most of the deals have been in the United States and the sellers have been mostly large financial institutions. Lichter says that his group is also talking to many insurance companies, individual investors and other financial institutions.
Before the close of this fund, Auda had been making secondary investments from its fund-of-funds. Auda made more than 50 secondary deals over the last 12 years, but now all of its secondary deals are channeled through its new fund and a specific secondary team headed by Lichter, who joined Auda in 2002 after leaving Lexington Partners.
The secondary group has a four investment professionals and plans to add more soon. Auda Advisor Associates is headquartered in New York. It was founded in 1989 and has more than $2.8 billion under management.
Pomona Adds in London
Pomona Capital has added former Barclays Capital executive Mark McDonald as an investment associate in its London office. The New York-based secondary buyer now has 19 investment professionals worldwide. It has been expanding in part because it agreed in March to manage about $1.1 billion in PE assets for the U.S. portfolio of Dutch insurance giant ING.