The private equity world is filled with intermediaries who decide to go beyond the role of advisors and become active in deals. The recent boom in secondary private equity advisors is now producing affiliated buying operations. Witness Allen Capital Partners, an affiliate of the New York Private Placement Network (NYPPE), which is seeking $250 million to acquire private equity limited partnership interests for Allen Capital Partners X (ACP X).
Greenwich, Conn.-based NYPPE was founded in 1998 and serves as a placement agent for the sale of small private equity stakes. It works with and has used Allen Capital Partners in the past to help its advisory clients shed private equity holdings since 2000. Two years ago, in February of 2002, the firm allowed investors to exchange their shares in 18 private portfolio companies for interests in the then newly created ACP IX Fund.
ACP X is the first fund that is focusing on making purchases from institutional sellers rather than individuals. OffRoad Capital Markets, which NYPPE acquired in April of 2001, is acting as a placement agent for the fund. Like its predecessors, the fund will have access to proprietary deal flow coming from the NYPPE network. Allen Capital Partners expects to have the fund closed by the end of the year.
ACP X will focus on what NYPPE president and CEO Lawrence Allen calls “special situation private equity secondaries.” The three main categories of special situations the fund will focus on are delinquent LPs, “out of favor structure” such as funds-of-funds or trusts and transfers that require quick settlements in order for general partners to approve the deal. “You’re seeing the asset class evolve to another level now where portfolio managers are looking for similar services that they have in other asset classes,” says Allen. ACP X will also enable LPs to open lines of credit through the fund using their private equity holdings as collateral. “We want NYPPE to be viewed in the market as the leading source of liquidity,” adds Allen. “The selling customer has to define what is the best execution.”
NYPPE is not alone in breaching the gap between secondary strategic advisor and secondary buyer. New York-based secondary advisory firm Columbia Strategy has an affiliate, Morning Street Partners, which is also raising a fund. Unlike Allen Capital Management, Morning Street is interested in buying direct interests in private equity-backed portfolio companies. Partners from Morning Street declined to comment, citing legal caution during their current fund raising effort.
John Costello, a director with SSG Capital Advisors who leads its secondary advisory practice, says the trend of advisors moving towards doing deals themselves makes sense.
“A lot of people want to be on the principal side of things,” he says. He adds though that there is the danger of a possible conflict of interest for such firms. “My feeling is that there’s conflict if you try to do both, much as if you’re in the direct investment game. It’s hard to be a true independent sell side advisor if you have a fund.”
So might there be conflicts of interest for Allen Capital Partners and NYPPE? “Potentially,” says Allen. “But it’s the same conflict that exists with merchant banks and their banking funds. The key is following the client’s request. If a seller comes to NYPPE and says I want a best price,’ that might be a situation where NYPPE does not show the offering to ACP X, because it’s not a special situation. NYPPE has many buyers and we encourage them to tell us what niche they’re focused on. An investor will explain to us what their niche is and that will be the deal flow that they see from us.”