CSFB Closes Third Secondary Fund with $2.4B

While their counterparts in Major League Baseball are happy to operate without caps on the salaries of their teams, large secondary buyers put caps on their funds for the benefit of their limited partners. That doesn’t stop groups like Credit Suisse First Boston from raising funds 10 times the size of the Yankees payroll, though. The financial giant’s private equity group, CSFB Private Equity, told PE Week that it soon expects to close its latest secondary fund, CSFB Strategic Partners III, with $2.4 billion.

CSFB Strategic Partners III is comprised of three separate funds or fund components: a $1.9 billion LBO vehicle, a $315 million real estate component and a $210 million venture capital fund. All three funds will begin their investment period on July 1st and the firm is already working on transactions for them.

The fund marks CSFB’s growing interest in venture. While still the smallest part of its fund, the group began took a greater interest in venture with its second fund. Venture portfolio transactions will also comprise a greater share of its venture portfolio. Whereas fund II saw direct portfolios make up only about 5% of its venture buys, fund III’s direct portfolio share will be about 20%. “In our second fund we’ve started to nibble on venture transactions and that has grown into a steadier appetite for us,” says Managing Director Stephen Can.

Those venture nibbles in fund II include the remaining portfolio of Angel Investors second fund (see PE Week, May 16, 2005). According to the sale document as well as a letter sent to limited partners by Angel Investor’s general partners, CSFB will buy the remaining portfolio of the Angel Investors II fund for approximately $7.8 million. The fund closed in 2000 with $125 million.

Can says that 90% of fund III’s dollars come from returning limited partners. Those returning LPs include the Pennsylvania Public School Employees’ Retirement System (PSERS) and the New York State Teachers’ Retirement System. Can says that CSFB added some endowments and universities, a few insurance companies and a lot of high net worth individuals to its LP roster.

CSFB agreed to a $2.4 billion cap and an 8% hurdle rate for the fund, both of which Can describes as being very important for the limited partners. CSFB gravitates towards lower risk buys and covers a wide range of transaction, with its average transaction size between $20 million and $25 million.

;This market is very tough, very competitive,” says Can. “There are a lot of dollars out there chasing transactions. Because the prices have gotten higher and people aren’t as averse to selling as before, it makes for a more vibrant market all the way around.

CSFB’s secondary group closed its first fund in 2001 with $832 million. It was almost completely focused on LBO fund assets. Its second fund closed in 2003 with $1.9 billion in two underlying funds: a $1.6 billion LBO asset fund with a $300 million real estate secondary fund (see PE Week, December 15, 2003). The secondary group is comprised of 18 transaction professionals working from offices in London, New York and San Francisco. The firm is considering opening an office in either Asia or Switzerland.

Email matthew.sheahan@thomson.com