Lexington Plots First Close On Secondary Fund At About $2.5B

Facing an unprecedented buyer’s market for limited partnership interests, New York-based Lexington Partners expects to hold a first close on its seventh secondary fund in early 2009, most likely during the first week of February. Meantime, the firm has reached about $750 million on its latest mid-market buyout fund of funds.

Brent Nicklas

, a managing partner and co-founder, anticipates the initial close will be at roughly half the $5 billion target. Marketing for Lexington Capital Partners VII began during the summer of 2008, and Nicklas wouldn’t be surprised to end up above $5 billion. “The secondary market is booming right now,” Nicklas said. “Given the dislocation in the markets, so many LPs are out there looking for liquidity. It’s a great place to be.” The placement agent for the fund is The Blackstone Group’s Park Hill Group unit.

Expect roughly 70 percent of the fund to be used to acquire interests in U.S. partnerships, according to limited partner Montana Board Of Investments, which approved a commitment of $20 million on Sept. 30. Lexington Partners, which has a target of achieving a net IRR of 20 percent, plans to invest an average of $20 million to $60 million in each deal during an investment period expected to stretch from 2009 to 2012, according to the LP. However, “based on prior periods of distress, it is possible that there will be a bulge of secondary transaction opportunities from late 2009 through 2010,” states a document prepared by Montana Board of Investments.

According to data from California Public Employees’ Retirement System, a prior fund, Lexington Capital Partners V, had an investment multiple of 1.7x and a net IRR of 26.8 percent, as of June 30.

In related news, Lexington Partners has reached about the three-quarters mark on closed commitments for Lexington Middle Market Investors II, whose target is $1 billion. Marketing for this fund began early in the spring of 2008. The firm’s previous mid-market fund, the vintage 2005 Lexington Middle Market Investors, closed in September 2005 at $550 million. That fund had an investment multiple of 1.2x and an IRR of 19.2 percent, as of June 30, according to CalPERS data.

The firm’s previous secondary fund, Lexington Capital Partners VI, a $3.8 billion vehicle that closed in 2006, is about 90 percent committed. Founded in 1994, Lexington Capital is considered a pioneer in the secondary market.