- Proposed deal requires LPAC approval
- Gives LPs option to cash out interest in single company
- New investors lined up
Hellman & Friedman is seeking to allow investors in an older fund to cash out their interests in a single investment called Kronos Inc, while giving the firm the ability to hold the investment longer.
The deal, which still needs LP approval, is another example of a high-profile, large private equity firm finding a creative way to deliver proceeds to investors in older funds. It also illustrates a rising trend of GPs running liquidity processes on single assets out of larger funds, as opposed to full fund restructurings.
The San Francisco-based firm is seeking approval from investors to shift Kronos, a cloud-based human resources software provider, out of Fund VI into a vehicle created specifically to hold the investment, three sources with knowledge of the process told Buyouts. Fund VI closed on $8.4 billion in 2007.
Hellman alongside JMI Equity took Kronos private in a $1.8 billion transaction in 2007.
An investor group is lined up to buy out LPs that choose to sell interests in the company. That investor group includes Blackstone Group and Hellman’s Fund VIII, a $10.9 billion pool closed in 2014, one of the sources said. Blackstone already has a stake in Kronos, which it acquired along with GIC in a $750 million transaction in 2014.
The proposed transaction requires approval from the limited partner committees of both Hellman & Friedman funds, two of the sources said. It also includes two fairness opinions to make sure there are no conflicts involved with a firm’s newer fund buying a company out of an older fund, the two sources said.
It’s not clear if Hellman is working with an adviser on the deal. It’s also not clear when the advisory committees are expected to vote on the transaction.
Hellman tried to sell Kronos in 2014, but rejected bids from Advent International, Blackstone and Bain Capital that valued the company at more than $4.5 billion, Reuters reported. Blackstone ended up acquiring a minority stake in the company.
Spokespeople for Hellman & Friedman and Blackstone declined to comment.
Hellman is the latest in a series of large funds that have found ways to deliver proceeds to LPs in older funds. Many point to a secondaries deal last year by Warburg Pincus as setting the precedent for the industry. In that $1.2 billion deal, Warburg Pincus exited a strip of Asian assets from its 11th fund, moving them into a specially created vehicle capitalized by investors including Goldman Sachs, Lexington Partners and Adams Street Partners.
Other big firms are expected to find their way to the secondary market to provide exit options to LPs in older funds.
Because of the growing prevalence of such deals, the market is seeing more single-asset restructuring processes, sources said. Rather than full-fund restructurings, such deals target only one or a few assets in a larger fund.
“Go back five years, these transactions were so novel and new and complicated and expensive, you wouldn’t dream of going through all the work for a single asset; the execution risk was too high,” Andrew Ahern, partner at Debevoise & Plimpton, said. “Now these deals are more common, costs are lower and execution risk can be managed if the deal is done the right way.”
Providing liquidity options for a single asset is “an elegant way of splitting the investor base, allowing LPs to decide, am I more of a long-term holder or do I want liquidity now?” Ahern said.
Action Item: See Hellman & Friedman’s Form ADV here: https://bit.ly/2uAzpSW
Photo: A bird flies above a group of people fishing on Navy Pier in the Presidio of San Francisco, part of the Golden Gate National Recreation Area, on March 1, 2013. REUTERS/Robert Galbraith