The debt collection could involve the bank taking over management of HRJ’s funds and using the related management fees and other income streams to retire the debt. The bank deal may include an employment offer to HRJ executives to continue fund management.
In an email sent to clients, the bank said:
“HRJ has been a client of Silicon Valley Bank for over 9 years and SVB has a strong relationship with them. Since its inception in 1999, HRJ has had consistently strong investment performance. While potential arrangements are being explored, there will be minimal impact on our investment managers and, if a definitive agreement is reached, we anticipate it to include arrangements that will result in a stronger and deeper SVB Capital team.
Unless and until a definitive agreement is reached, we and HRJ will remain separate entities and we will continue to run our organization as we have done in the past.”
The bank loaned HRJ money to make investments as the fund of funds was raising money for its own funds. HRJ invests in buyout, distressed and venture capital funds and last year began raising a new buyout fund-of-funds with a $250 million target. It only raised about half that amount. At the same time, however, it committed nearly the entire target—leaving it between $120 million and $140 million short.
HRJ put up certain assets of its management company as collateral, including various revenue streams. Now that collateral may be up for collection.
“The strategy from the beginning of fund-raising was to make commitments ahead of securing investor capital, in order to give LPs more transparency into the portfolio,” says a source close to HRJ. “It’s what the firm has traditionally done, but fund-raising slowed down and then came to a halt… which no one had expected.”
Tracking exactly how much money any one HRJ funds has raised is difficult. For example, the firm’s third buyout fund is broken into eight investment vehicles, documents show. Just one of those vehicles, HRJ Global Buy Out III (US), raised just shy of $17 million from 12 investors during 2008. Another fund, HRJ Global Buy Out III (Asia), raised $27.4 million from 14 investors during 2008.
The firm filed regulatory filings associated with its various funds on a regular, two-month schedule, showing its fundraising progress through the year. The last filing associated with fund raising that any one of its investment vehicles made was in August, 2008.
HRJ is talking with secondary investors in an attempt to off-load its fund commitments, a source says. But the discount it may face for its portfolio could be significant. The average price for a top-quartile fund was 90.1% of its NAV in October, down from 100.07% in 2007, says Larry Allen, managing member of
It’s unclear what rights HRJ’s limited partners have at this point. The bank does not appear to have recourse on the actual committed funds. Forcing a fire sale of HRJ’s holdings to secondaries might open the bank to a lawsuit from LPs.
It could certainly put off a lot of Silicon Valley Bank’s own clients. Investors in HRJ funds include the Laurie K. Lacob Revocable Trust, an entity that shares a residential address with Joe Lacob, an investor with
A Silicon Valley Bank spokeswoman declined to comment on if her firm was involved in the talks with secondary firms. HRJ also declined official comment.
“They just kept driving toward the cliff, hoping that someone would build a bridge,” says a source familiar with the situation. “It was incredibly risky, and now they’re paying for it.”
HRJ was formed in 1999 by former
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