Harvest Partners may find ripe market for $1bn structured capital fund

Harvest Partners launched a third non-control, structured capital fund as market dislocation and liquidity constraints spawn opportunities for alternative equity strategies.

The New York private equity firm this week filed Form D fundraising documents for Harvest Partners Structured Capital Fund III and a parallel pool. The vehicles are together seeking $1 billion. Credit Suisse is the placement agent.

If Harvest meets the target, Fund III will be 27 percent larger than its predecessor. Fund II two years ago secured $786 million, Private Equity International reported. Its limited partners included Teachers’ Retirement System of the State of Illinois and State of Wisconsin Investment Board.

Harvest created the structured capital group in 2014 to be a non-control alternative to the firm’s mid-market buyout strategy. It specializes in making senior equity or junior debt investments ranging from $50 million to $300 million in businesses with revenue and values of $100 million to $1 billion.

Fund III is expected to maintain this approach, sourcing North American opportunities in business services and software, consumer and consumer services, healthcare, industrial services and manufacturing and distribution. Based on the group’s investing to date, many of the companies backed will be held by other PE firms.

Structured equity strategies have grown in popularity of late. Related investing, aimed at the mid-point of a company’s capital structure, allows owners to finance operations or growth objectives without diluting or liquidating their stakes.

For investors, structured equity deals offer the potential of a PE-like return with some downside protection, relative to common equity.

Structured equity could find a welcome market today, as many businesses face a liquidity crunch due to demand disruption and economic turbulence. In a Dechert broadcast in April, partner Jonathan Stott said challenges in this environment are creating new opportunities for the strategy, especially “where liquidity is constrained at the debt and common equity ends of the capital stack.”

Harvest’s structured capital group was first led by Jay Hegenbart, who left in 2017 to found Infinedi Partners. It is now headed by partner Steven Duke, who joined in 2014 from CCMP Capital, and partner Sean Murphy, who joined in 2016 from Angelo Gordon.

The group has recently been active on the deal front. The latest transaction, announced in March, saw Harvest and Blackstone Tactical Opportunities invest in the recapitalization of ConnectiveRx, a provider of tech-enabled biopharmaceutical services. Genstar Capital is the company’s majority owner.

Harvest Partners Structured Capital Fund I was generating a net IRR of 14.3 percent as of September 2019, according to data shared with Preqin by SWIB.

Harvest appears to have wrapped up fundraising for its eighth flagship buyout pool late last year. Fund VIII, originally targeted to raise $3.25 billion, collected more than $4 billion, Form D documents published in December show.

Harvest declined to provide a comment on this story.

Action item: Check out the investment overview for Harvest Partners’ structured capital group here.