Marlin Equity nets strong returns, but at high costs

Marlin Equity Partners is marketing its $2 billion flagship fund and $500 million small-market fund on the back of an overall portfolio that’s grossed a 1.8x and a 41.6 percent internal rate of return since inception, according to presentation materials obtained by Buyouts.

The returns ultimately netted by its fund investors, though substantial, were more than 40 percent less than what Marlin Equity grossed, according to the presentation. Net of fees, carried interest and expenses, Marlin Equity’s realized and unrealized overall portfolio generated 1.5x its funds’ invested capital and a 24.8 percent IRR.

On an IRR basis, the spread between Marlin Equity’s net and gross returns is nearly triple the 616 basis points (6.16 percentage points) averaged by private equity buyout funds raised between 1986 and 2010, according to recent research published by Cambridge Associates.

The wide gap between Marlin Equity’s net and gross returns might stem from the higher management fees it charged on its first two flagship vehicles. The firm’s 2005 and 2008 vintage funds charged slightly higher management fees — 2.5 percent and 2.25 percent, respectively — while subsequent funds charged 2 percent, according to the firm’s Form ADV filed with the SEC.

Outperformance and Marlin Equity’s 20 percent take of its funds’ investment profits also may have been a factor. The better a fund performs, the more likely its funds have significant “fee drag,” according to the Cambridge Associates research. The top five performing PE vintages netted an average 26.1 percent IRR and had a gross-to-net spread of 959 basis points.

Marlin’s first two vehicles exceeded Cambridge Associates’ averages for top-performing funds on both fronts. Marlin’s debut fund grossed a 167.1 percent IRR and 3.4x multiple, while netting 42.3 percent and 2.7x, the presentation shows. Fund II grossed a 50.1 percent IRR and a 3.8x and netted fund investors a 35.2 percent IRR and 3x multiple, according to the presentation.

The firm did not respond to a request for comment.

In February, Teachers’ Retirement System of the State of Illinois committed $80 million to the firm’s funds. Given its track record, Marlin is expected to be able to attract enough demand to hold a first and final close on its new flagship fund, Buyouts reported last year. “I’d be surprised if they got below $2.5 billion,” one LP said at the time.

Marlin specializes in middle-market special-situations investments, typically targeting companies facing operational or financial stress and sellers who may have non-economic motivations for unloading their assets.

The firm was founded in 2005 by Managing Partner and Chairman David McGovern and Partner Nick Kaiser. Marlin Equity maintains offices in Hermosa Beach, California, and London and has more than $3 billion under management.

Action Item: For more on Marlin Equity: www.marlinequity.com

Photo of David McGovern courtesy of Marlin Equity