KRG tender offer shows how GPs can control secondary selling

Tenders are less complicated than fund restructurings and can be used to help a GP inject cash into a new fund on the market that may be having trouble raising capital.

One such deal comes from KRG Capital Partners. It is offering limited partners in its $1.96 billion Fund IV the ability to sell their stakes to a pre-selected buyer; the buyer would also provide capital for KRG’s fifth fund, according to four people with knowledge of the process.

KRG’s tender offer is being run by Credit Suisse, the people said. Credit Suisse did not respond to a request for comment.

KRG has not disclosed the name of the buyer or the price being offered for LP stakes. Firm co-founder and Managing Director Bruce Rogers did not respond to a request for comment.

Two of the sources told Buyouts that the tender offer is a way to give LPs in the aging Fund IV an exit option, as well as to give a boost to fundraising for Fund V, which is in the market targeting $500 million, according to a Form D filing from March.

KRG closed its fourth fund in 2007 after about six months in the market, beating its $1.25 billion target. The fund was KRG’s largest at the time.

What KRG has proposed is similar to a transaction that Ardian did earlier this year, when it acquired a stake in KRG Fund IV through its purchase of a private equity portfolio from the Pennsylvania Public School Employees’ Retirement System, three of the sources said. As part of that deal, Ardian provided a small capital contribution to Fund V, the sources said. Ardian also syndicated part of its acquisition to other buyers, according to one source, a secondary market professional.

Shree Dhond, a spokesman for Ardian, did not respond to a request for comment.

A tender offer is different than a fund restructuring in that LPs simply have the choice to sell or not. In a tender offer, the GP holds an auction to choose a buyer before making the offer to LPs. Once a buyer is selected, the GP lets the LP base know the offer is on the table.

In such deals, conflict can arise if an LP in the fund has already chosen a different buyer who is offering a higher price than the GP’s pre-selected buyer. The GP, who ultimately approves secondary trades, can reject an LP’s preferred buyer.

GPs also may choose to use a tender offer as a way to control selling of interests in their funds on the secondary market as active selling can be an administrative burden, according to an LP with knowledge of the process.

It’s also not clear if existing LPs in KRG Fund IV will have to pay Credit Suisse for managing the tender offer process. Who pays the agent fee differs from deal to deal, but LPs prefer when the buyer picks up the tab.

The tender offer is part of an ongoing effort by KRG to raise new capital, which has proved challenging as the firm’s past performance has not been strong.

The return for Fund IV is just below average for private equity funds from the same vintage year, according to alternative assets data provider Bison. KRG’s two prior funds (from 2001 and 2005) have significantly underperformed other PE funds from the same vintage years, while its 1999 debut fund had above-average performance, Bison reported.

Fund IV was generating an 8.04 percent net internal rate of return and a 1.23x multiple as of December 31, Bison said. It’s not clear how much net asset value remains in Fund IV.

Prospective Fund V investors may also be concerned about several departures from KRG over the past few years. Most notably, KRG co-founder Mark King left in 2013 and formed Revelstoke Capital Partners along with former KRG executives Simon Bachleda and former chief fundraiser Dale Meyer. Revelstoke is currently in the market raising its debut fund.

Also in 2013, former KRG executive Jay Coughlon co-founded Lariat Partners with Kevin Mitchell, formerly of RedCloud Capital.

And back in 2006, former KRG Directors Robert Martin and David Kessenich left the firm to start Excellere Partners.