Golden Gate’s ‘Perpetual’ Fund Scores Another $3.5 Billion

Firm: Golden Gate Capital

Fund: Golden Gate Capital Opportunity Fund

Amount Raised: $3.5 Billion

Major Investors: Harvard, Yale, Princeton, MIT, the Bloomberg Family Foundation

With a distinctive “perpetual” fund structure and 25 percent carry charge, Golden Gate Capital raised a new round of $3.5 billion for its Golden Gate Capital Opportunity Fund, according to people familiar with the fund. The fundraising round was completed in a remarkably short, 60-day period, in part due to the fund’s unique structure.

San Francisco-based Golden Gate Capital, which has about $12 billion under management, was founded in 2000 by David Dominik and Jesse Rogers, who worked for Bain Capital and Bain & Company, respectively. In 2010, Rogers left Golden Gate to start Altamont Capital Partners, a mid-market buyout firm.

Golden Gate has made its name by investing in high profile software, retail and restaurant companies, and recently made headlines by buying California Pizza Kitchen for about $470 million. It has also invested in Eddie Bauer and Express, both clothing retailers.

A perpetual fund is set up to have a permanent base of capital. Investors who commit to such a fund do so with the expectation that they will pledge fresh money to that same fund about once every four years. Thus, the new fundraising round is essentially a re-up, except that it’s with the same fund, according to a person familiar with the fund’s structure.

A spokesman for Golden Gate Capital declined to comment.

By definition, most of the $3.5 billion in fresh funding came from existing investors, most of which, in Golden Gate’s case, are foundations and university endowments. According to Preqin and Dow Jones, the firm’s investors have included the endowments of Harvard University, Yale University, Princeton University, Northwestern University, the Massachusetts Institute of Technology and the University of Virginia, as well as the MacArthur Foundation, the Bloomberg Family Foundation and the Packard Foundation.

In many ways, a perpetual fund operates like a typical private equity fund, except that it could, if it chose, retain its portfolio companies indefinitely. In most cases, however, perpetual funds eventually exit their positions, and profits and exit proceeds are distributed back to investors.

The fund’s permanent base of capital also makes it easier to refinance portfolio companies, according to one source, although Golden Gate is known to use “very little leverage.”

The most obvious aspect of a permanent fund structure is that it makes it much easier to raise money, since there is a built-in expectation that existing LPs will commit again. Because there is less fundraising pressure on the firm, “a GP can spend more time investing, and less time raising money,” the source said.

And instead of a GP trying to convince existing investors to commit to a new fund, investors are expected to “re-up” or “opt out.” If an investor opts out, the investor’s existing stake may be sold or transferred to a sidecar vehicle, where investments would be gradually wound down.

Nevertheless, according to one source, the re-up expectation carries a price, which is that it binds investors to future commitments, even if their circumstances change or key people at the GP leave the firm. Also, a poor performance by a GP could eventually lead to more investors opting out. “Investors generally want to get their money back,” the source said, “and they want to be able to make a new investment decision every four or five years.”

Fortunately for Golden Gate, performance has been strong, and there has been a clamor by new investors to invest with the firm. A placement agent not affiliated with the firm said, “Golden Gate has a tremendous reputation as an investor.” He added: “it would be difficult to have this kind of fund structure without a top-decile return. You really have to have consistently high returns to have this structure.”