Golden Gate closes bridge on annex fund

Golden Gate Capital has quietly closed on a $614 million annex fund, which will be used to supplement the $1.8 billion it raised in 2004 for Golden Gate Capital Fund II.

The San Francisco-based firm told limited partners about the final close during its annual meeting earlier this month, according to multiple sources in attendance.

What Golden Gate didn’t tell limited partners, however, was much about how its next non-annex fund will be structured. Reportedly, the firm will use an “evergreen” structure for the next fund, as first reported by (an online sister publication of PE Week) in January. The firm has not commented on the structure of its next fund.

Evergreen structures are unusual in the private equity market, with General Atlantic being one of the few, if not the only large firm, to employ them. Under the structure, limited partners commit to a fund at a time of their choosing, so long as the firm agrees to accept them. The firm then deploys its capital, and goes back to its LPs for additional capacity when needed. For example, General Atlantic last year raised its capital capacity from just under $4 billion to $5 billion, with a little more than half of the increase coming from existing investors through the evergreen structure.

The primary upsides of evergreen funds are firm stability and added flexibility in making investments. However, evergreen funds don’t provide as much standardized accountability as do traditional fund structures and can be administrative nightmares for the general partner.

Sources say that Golden Gate will almost certainly employ an evergreen structure for fund III, with pre-marketing expected to begin late this year. It also will accept select funds of funds as limited partners, contrary to rumors this spring that it was going to employ an exclusion strategy similar to Sequoia Capital. To raise its next fund, Golden Gate will schedule four-year rolling closes that will be workable with the vintage-year strategies of most funds of funds.

No word yet on exactly how much Golden Gate plans to raise, but it did tell LPs that it plans to put about $600 million to work per year, which means that the fund III target could likely approach $2.5 billion. The new fund will almost certainly be oversubscribed, given that an LP told PE Week that Golden Gate’s first fund “has returned 5x with a 67% IRR and still has legs.”

Golden Gate currently has about $900 million in dry powder, which includes $300 million remaining from Fund II and the new annex capital.