BUYOUTS-New venture aims at $100 bln 'zombie' fund market
* Kirchner Group, Crestline Investors in joint venture
* Team up to buy troubled private equity assets
* W.B. (Bud) Kirchner to lead new business line
By Steve Gelsi
NEW YORK, May 1 (Reuters-BUYOUTS) - Merchant bank Kirchner Group and Crestline Investors Inc, a hedge fund secondary buyer with $7.3 billion under management, have teamed up to launch a joint venture aimed at taking over management of so-called zombie funds from their original private equity sponsors.
The Crestline-Kirchner Private Equity Group plans to acquire, manage and invest in underperforming private equity assets, portfolios and funds. The joint venture has headquarters in Fort Worth, Texas, the hometown of Crestline Investors, and will also have offices in New York and Toronto.
The universe of U.S. zombie funds - poor-performing private equity funds whose managers have little hope of raising more money - measures about $100 billion in assets, according to industry estimates cited by the two firms.
W.B. (Bud) Kirchner, who founded Birmingham, Alabama-based Kirchner Group in 1985, will lead the new business line. Kirchner will be joined by Dave Philipp, head of asset management for Kirchner Group, which in recent years has built a business taking over management of troubled private equity portfolios on behalf of limited partners. Crestline Investors will provide most of the staff for the joint effort, but specific numbers haven't been determined, Philipp said.
Crestline-Kirchner Private Equity Group will tap into $1.9 billion allocated for "opportunistic investments" by Crestline Investors, a 16-year-old firm that describes itself as a leader in the secondary hedge fund market, providing liquidity to investors in exchange for their stakes in funds. Opportunistic investments include both secondary purchases of LP interests in hedge funds as well as the zombie fund investments.
The new firm plans to act as a fiduciary to replace or complement general partners of funds; provide advisory services for limited partners; create successor funds by consolidating direct private equity investments into a fund structure; and shop for investment opportunities such as follow-on capital at the portfolio level.
In a prepared statement, Kirchner said the partnership "provides tremendous validation" of his firm's business model. "Now is the right time for us to scale up to meet rapidly increasing market demand," he said, adding that the deal with Crestline Investors will provide "institutional infrastructure and access to capital."
Douglas Bratton, president and chief investment officer of Crestline Investors, said in a prepared statement that the new alliance would add a "powerful new business to our institutional platform" and tap into Kirchner Group's success "deploying its model across a series of portfolios ranging from early stage venture to mid-market buyout since 2004."
Among its zombie fund deals, Kirchner Group has taken over management of the renamed Emerald Partners V LP fund. LPs such as HarbourVest Partners had ousted Brantley Partners as general partner and manager of the former Brantley Partners V LP, a $150 million private equity fund raised in 2007, after a court battle.
Paul Choy, managing director of Kirchner Group, said in an interview that six investments remain in Emerald Partners V after two exits since his firm took it over in early 2011. Kirchner Group remains on track to sell the remaining portfolio companies in the next two to three years.
"This is for us an ongoing business model," Choy said. "We replace or complement the GP in underperforming funds, turn them around on behalf of the LPs, accelerate return of capital, and recover value within the portfolio. With the joint venture with the Crestline Investors, we are accelerating and expanding that program."
Crestline Investors' senior management team started investing in opportunistic strategies for members of the family of Texas oil man Perry R. Bass in the mid-1980s. The firm launched its first dedicated opportunistic fund in 2005.