Insight Partners targets $875m for preferred equity strategy amid covid dislocation

Insight Partners is targeting $875 million on a fund aimed at taking preferred equity stakes in software companies, according to pension documents, with a $1.25 billion hard-cap.

This is Insight’s first fund to focus on this strategy, and it already has at least one committed co-investment.

Insight Partners Opportunities Fund will target “minority, structured preferred equity positions in leading, sponsor, venture capital or founder-owned companies primarily in the US,” according the New York State Comptroller’s website. New York State Common Retirement Fund committed $150 million to the fund.

“This strategy entails making investments in targeted companies through a new class of equity that is senior to other equity and has a contractual return accompanied by the ability to convert into common equity, thereby offering the ability to capture upside opportunities,” said Pennsylvania Public School Employees’ Retirement System chief investment officer James Grossman at the pension’s October 8 investment committee meeting.

Insight, which specializes in the technology industry, believes many software companies will prefer to take on equity investments as opposed to selling, PA Schools’ staff said in a memo.

“With the software M&A market significantly impacted, debt financing markets effectively closed, and uncertainty surrounding valuations, the owners of software companies originally planning for exit events are postponing the exit process and exploring alternative liquidity solutions,” the memo said.

The fund will have a “flexible” approach with the ability to use “convertible bonds, common equity, related equity securities, mezzanine, first-lien senior debt, revolving credit facilities and other subordinated instruments as well as stressed and distressed debt securities.”

PA Schools committed $168.75 million to the fund, with $75 million going to the fund itself and $93.75 million going to a co-investment vehicle. The fund has done two previous fund commitments and two co-investments with Insight Partners in the past.

Earlier this year, Insight closed its 11th flagship fund at $9.5 billion. Insight Partners Fund X closed in 2018, and has a 14.8 percent internal rate of return and a 1.2x multiple, according to the memo.

Action Item: read the PA Schools public memo on Insight Partners Opportunities Fund I here.