Deerpath seeks to deliver liquidity to investors in older lending funds

Deerpath Capital is working on a secondary process to move out legacy assets from older direct lending funds and enable investors to cash out, two sources told Buyouts.

The process is unusual in that it involves a private lending shop rather than a buyout firm. Sources said, however, they are seeing more private-credit-related transactions come to the secondary market.

The deal would create a new vehicle to house credit positions out of Deerpath’s first three funds. Those legacy credits would be transferred to a new vehicle that would give the GP more time to manage them out, the sources said. As part of the deal, the three early funds will be wound down, the source said.

The deal is valued at about $200 million, a source said. Pantheon is said to be anchoring the deal as lead buyer. The transaction is still being syndicated out to other potential buyers, one of the sources said. 

Evercore is secondary adviser on the transaction, the sources said.

A spokeswoman for Deerpath declined comment. Spokespeople for Pantheon did not return a request for comment.

Deerpath was founded in 2007 and is led by former GE Capital Chairman and Chief Executive Gary Wendt; James Kirby,  who formerly was a managing director at Dune Capital Management and Madison Dearborn; John Fitzgibbons, who founded J Fitzgibbons LLC and Basin Holdings; and Tas Hasan, former investment professional at Dune Capital and GSC Group.

The firm has raised four funds so far, with Fund IV targeting $500 million. How much the fourth fund raised is unclear.

Deerpath typically invests $5 million to $40 million in sponsor-backed or owner-operated middle-market companies.

Such a deal benefits LPs because it provides cash flow that they can recycle into other leveraged-credit funds, sources said.

For the GP, the restructuring potentially rejuvenates the performance of older credits, the source said. Direct-lending managers tend to put leverage on funds to help juice private lending returns into the low teens, sources said.

For example, Deerpath in its Fund IV was targeting unlevered net returns in the range of 6 to 9 percent, investment documents from Philadelphia Board of Pensions & Retirement show. With leverage, such returns could ramp to 12 to 15 percent, sources said.

Eventually, however, distributions go to paying down the leverage, reducing returns later in the fund’s life, sources said.

A deal like this, which creates a new vehicle, gives the GP the chance to move older assets into the fund and reapply leverage to the pool, potentially boosting returns on the older credits, sources said.

Action Item: Check out Deerpath’s Form ADV here: https://bit.ly/2Fwspei