KPS Scores Extra $800M For Fund III

At a time when nearly every general partner is struggling to raise funds, KPS Capital Partners has hit one out of the ballpark with its oversubscribed play to collect an additional $800 million for KPS Special Situations Fund III, a fund that closed in 2007 with $1.2 billion.

The newly collected pool of capital, known as KPS Special Situations Fund III (Supplemental) LP, will be used for future investments in turnarounds, restructurings, bankruptcies and other special situations, according to a statement prepared by the New York-based firm.

The money was raised to take advantage of the “unprecedented level of distressed opportunities in the current environment with limited competition from other financial firms,” according to a board document from the Arkansas Teachers Retirement System. The firm will invest only in new transactions with the supplementary funds, most likely doing 12 to 15 deals with it.

Though the effort was ultimately capped at $800 million, KPS Capital received subscription requests of more than $1.3 billion for the “upsizing,” as the firm described the fundraise in a press release on Sept. 8. The Massachusetts Pension Reserves Investment Management Board was on board for the recent effort, committing $100 million to the supplemental fund.

Success on the fundraising circuit is nothing new for KPS Capital. KPS Special Situations Fund III secured pledges totaling $1.2 billion in less than four months in early 2007, even though the firm charged a premium carried interest rate of 25 percent on the vehicle. The supplemental capital raised this year has the same 25 percent carried interest structure.

Supplemental funds—also known as add-ons, top-ups, top-offs or re-opens—allow firms to increase their capitalization in order to make more investments though an existing fund. Related vehicles include annex funds, which are used to support existing portfolio companies, and side-car funds, which are often used to allow an LP to take larger capital positions in deals it finds appealing via co-investments alongside general partners. The management fee and carried interest are often much less for side-car funds.

So why would a firm bother with a supplement to a closed fund rather than simply raising a new vehicle? As shown in the table, firms offer a variety of reasons for creating supplemental funds. Gryphon Investors and Littlejohn & Co. cited the ability to avoid a big marketing program. KSL Capital Partners wanted to make bigger investments.

But there are legal advantages, too. Fund agreements usually restrict the raising of a new or successor fund with a similar focus during the investment period unless consent is obtained, usually via an LP vote and sometimes by a vote of the advisory committee as well, said David T. Jones, a partner with law firm Proskauer Rose LLP. By re-opening a fund, the general partner avoids potential investment opportunity conflicts.