Fund Profile: Coller Capital International Partners VII

Coller Capital International Partners VII divides LPs into two classes. Coller will charge Class A investors a higher management fee – 1.5 percent of committed capital during the five-year investment period, with step down reductions to less than 1 percent of invested capital – in exchange for a larger share of the fund’s returns, according to a NEPC memo included in New Hampshire Retirement System meeting materials. The firm will take 10 percent carried interest from Class A LPs.

Coller will take 20 percent carried interest from Class B investors for a significantly discounted management fee – just 0.85 percent of committed capital during the investment period.

The separate fee and carry structures will likely result in different return profiles, with Class A investors coming out ahead, according to the NEPC memo. The excess returns generated by a 10 percentage point cut to carried interest payments will likely exceed whatever savings Class B investors pick up from a reduced management fee.

That said, the Class B structure offers more downside protection. The lower management fee on those stakes would result in Class B investors “marginally” outperforming Class A LPs if the firm fails to clear its 1.5x net targeted return multiple, according to the NEPC memo. Both classes of LPs will break even if the fund returns between 1.2x and 1.3x net.

“Class B shares are viewed as a reasonable option for clients preferring lower management fees, additional downside protection should the investments underperform, and/or greater alignment of economic interests provided by the higher carried interest rate option,” according to the memo.

NEPC is pointing its clients toward Coller’s Class A terms, noting that Coller cleared the break-even point with each of its previous International Partners funds. All six iterations netted multiples in the 1.4x to 1.6x range as of Dec. 31, according to a redacted Fund VII presentation.

Citing Preqin data, the presentation said Funds I, II, III and V have generated top-quartile returns. It described Fund IV as a second-quartile fund, noting that it netted a 1.4x return and a 12 percent IRR.

While it is too early to assess the long-term performance of Fund VI, the firm’s $5.5 billion 2012 vintage fund, the vehicle had already netted 1.4x and a 25 percent IRR as of Dec. 31, according to the presentation.

Investment strategy

Coller International Partners VII will invest in complex secondary market transactions, acquiring portfolios of private assets or private equity fund stakes from banks, insurance companies, hedge funds and general partners, according to LP memos.

The fund will likely purchase the bulk of its stakes from banks, according to the firm’s Fund VII presentation. In the U.S., the Volcker Rule’s inclusion in Dodd-Frank legislation forced banks to unload significant portions of their private equity portfolios on the secondary market. Likewise, Basel III regulations in Europe led many financial institutions there to take similar measures.

Coller estimates U.S. and European banks still have more than $100 billion of private equity assets on their books. GPs, insurance companies and hedge funds hold between $170 billion and $200 billion of assets that could be accessed via the secondary market, the firm said.

Limited partners have developed a strong appetite for the secondary market over the last several years. Placement agent Triago recently estimated that secondary funds hold $71 billion of dry powder and that transaction volume in 2015 could hit $38 billion, a new record.

Coller International Partners VII has attracted interest from several public pensions, including the Louisiana State Employees’ Retirement System, New Hampshire and the Pennsylvania Public Schools Employees’ Retirement System, according to reports and pension documents.

The firm is targeting a final close for the fourth quarter, according to the NEPC report.

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