This post is by WSJ.com: Private Equity Beat
from WSJ.com: Private Equity Beat
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Over the past year, we’ve covered a number of firms marketing annex funds in an effort to drum up additional capital to support their portfolio companies through the downturn.
Now, get ready to meet the annex fund’s slightly better dressed cousin, the top-up fund.
At least two firms are in the market with top-up funds and there may be others in the wings. New York-based turnaround investor KPS Capital Partners LP is seeking $800 million to boost the buying power of its third fund, KPS Special Situations III LP, which wrapped up at $1.2 billion in 2007. Meanwhile, London-based buyout shop Graphite Capital Management LLP expects to collect a more modest GBP30 million (approximately $50 million) to augment a GBP555 million pool that it closed in 2007.
Unlike an annex fund, top-up funds invest in new transactions alongside the remaining unspent capital in an earlier fund, and firms have different reasons for wanting to raise them. KPS Capital Partners, for example, told investors that it wants the additional money to take advantage of the “unprecedented opportunities” coming out of the current market downturn.
Graphite tells investors that it needs more money to finance larger equity contributions in deals, now that the debt markets have all but shut down, according to several Graphite investors. The additional capital would also give the firm the flexibility to back deals at the larger end of its size range without exceeding limits, imposed by fund terms, on the amount of equity it can invest in a single transaction, these investors said.
Top-up funds aren’t quite a new concept. Back in late 2005, CVC Capital Partners raised EUR4 billion to top up CVC European Equity Partners IV LP, a EUR6.5 billion buyout fund that CVC had closed earlier that year.
However, it remains to be seen exactly what kind of reception these funds receive from investors, particularly in the current environment.
So far, KPS has rounded up the $800 million it sought, after receiving $1.3 billion worth of investor interest, according to people familar with the fund. The firm was also able to retain its premium 25% carry, one person said.
However, KPS may be more the exception than the rule in the current market.
“It’s case by case,” said one investor that is looking at the KPS fund. “There aren’t that many investors that have money to put into new funds these days, even for good managers.”