As the secondary market gets ready for the bidding wars that are ripe to flare up over an upcoming sale by CalPERS, the private equity world celebrated another large deal closing last week. The Goldman Sachs Asset Management private equity group and the Canada Pension Plan Investment Board (CPPIB) agreed to purchase a $925 million private equity fund share from J.P. Morgan Partners.
The two private equity firms teamed up with other investors, including Paul Capital Partners to buy the large interest in J.P. Morgan Partners Global Fund (JPMP Global Fund). The other investors were not disclosed, but are comprised of endowments, foundations and pension funds that invested a relatively small amount in the transaction.
CPPIB invested more than $300 million for a 35% stake in the assets. It had previously invested $174 million in the fund as a primary LP. Goldman Sachs provided the largest share of the capital for the purchase and used capital from several of its funds. Paul Capital Partners’ investment was relatively small by comparison, according to people familiar with the transaction.
The deal was an exclusively negotiated transaction after Goldman Sachs approached the partners of the J.P. Morgan private equity group with the intent to buy a stake in the fund. J.P. Morgan Partners, the private equity unit of JPMorgan Chase & Co., is in the process of spinning out to form the independent CCMP Capital. The current general partners will continue to manage the portfolio assets.
Goldman Sachs refers to the buy as a “synthetic secondary” to differentiate it from traditional secondary deals in which secondary groups buy limited partners’ shares of private equity funds and buyout secondaries (also known as sponsor-to-sponsor deals), in which a buyout firm purchases a company from another buyout firm.
“These types of deals don’t come along that often,” says Mark Wiseman, CCPIB vice president for private equity investments. He says he’d like to see the transaction act as a bellwether for the private equity industry. “It shows that we can create a win-win situation. I hope it’s the case that more transaction like this can be done.” Wiseman added that the deal was significant for CPPIB because it is moving towards a more active management strategy and it shared a leading role in getting this deal done.
Wiseman points out that unlike many large buyout deals that contain a significant debt component this secondary buy is being made entirely with equity. He also points out that the secondary purchase is one of the largest deals of its kind, and joins the ranks of only a handful of secondary deals in the $1 billion range. Last year Dayton, Ohio-based energy giant DPL (Dayton Power & Light Co., NASDAQ: DPL) announced it sold its interests in 46 private equity funds to AlpInvest Partners and Lexington Partners for almost $1 billion. Three years ago, MidOcean Partners acquired the late-stage private equity portfolio of Deutsche Bank‘s DB Capital Partners for $1.625 billion. This was the largest secondary buyout ever, topping Coller Capital‘s $1 billion purchase of the former National Westminster Bank portfolio in 2000.
JPMP Global Fund is a vintage 2001 fund that raised $6.3 billion, according to Thomson Financial (publisher of Buyouts). It is a buyout and growth equity fund with 91 portfolio companies in it. Companies in the portfolio include Brand Services, a Chesterfield, Mo.-based scaffolding equipment supplier; Sidney, Neb.-based Cabela’s, which markets supplies for camping, fishing, hunting and other outdoor recreation; Safety-Kleen Europe, a Middlesex, U.K.-based provider of environmental waste cleanup services and Spanish telecom provider Grupo Ono.
Last year, Goldman Sachs closed its latest secondary fund, GS Vintage Fund III, with $1.5 billion. Goldman Sachs Vintage II closed in 2001 with $1.1 billion. The firm also raised GS Vintage II Offshore in 2001 with $385 million. Goldman’s secondary group raised its first fund in 1998 and typically purchases buyout portfolio and fund interests from large institutional investors.
The Toronto-based Canada Pension Plan Investment Board was founded in 1997 and has more than $3.5 billion (C$4 billion) committed private equity funds. Secondary firms comprise about 17.5% of the CPP Investment Board’s private equity portfolio. CPPIB has approximately $81 billion (C$92.5 billion) in assets under management.
Wiseman says that it was “reasonably well known” among secondary market buyers that the JPMP Global Fund assets were for sale. CPPIB expressed interest to J.P. Morgan Partners and eventually connected with Goldman Sachs. “Goldman Sachs had done the same so it was logical that we come together. It was one of those things where the telephone calls kind of crossed,” says Wiseman.
CPPIB also had a previous relationship with Paul Capital Partners. The two groups have partnered before on secondary transactions, and to form the CPP Investment Board-Paul Capital Holdings II, a $310 million limited partnership managed by Paul Capital Partners that acquires secondary portfolios. Wiseman says that while Paul Capital did not contribute as significant a portion of equity as Goldman Sachs or CPPIB, they were instrumental in providing a leadership role and analysis. CPPIB is based in Toronto and manages about $8.7billion (C$10 billion) in private equity assets as of last September. Goldman Sachs Asset Management oversees approximately $15 billion of capital. It is the asset management unit of parent financial giant The Goldman Sachs Group (NYSE: GS), which manages $571 billion.—M.S.