Montana sells CIVC fund at premium in staple transaction

CIVC Partners earlier this year closed its fifth buyout fund with the help of a staple transaction that cashed out a limited partner who was not investing in the new vehicle, Montana Board of Investments documents show.

The Chicago middle-market firm closed Fund V on $400 million in May. The fund had been in market since at least 2015, when the firm filed a Form D fundraising document. Atlantic-Pacific Capital was placement agent.

CIVC couldn’t immediately be reached for comment.

Edward Kelly, alternative-investment analyst for the Montana Board, said the system sold its Fund IV interest at a premium. The premium makes sense because Fund IV is a strong performer: It was generating a 33.26 percent internal rate of return and 1.72x multiple as of Sept. 30, 2016, Montana performance data shows.

The sale was part of a staple transaction with the buyer of Montana’s interest also kicking in a commitment to the new fund.

CIVC approached Montana to see if it was interested in a secondary sale of its interests in Fund IV, since it wasn’t committing to Fund V, the documents said. CIVC had eight potential buyers lined up for the stake, which narrowed to three.

Montana staff was concerned that the reference date valuing the stake was Sept. 30, 2016, “prices which did not consider the post-election market run up,” the documents said.

Montana counter-offered, which caused two of the three bidders to drop out. The last bidder was open to the revised pricing and offered a cash payment at once or a deferred payment for a year.

The system settled the deal on March 31, 2017, for all cash, which captured the Sept. 30, 2016, value plus a monetized incremental amount, the documents said.

The secondary market has become an important tool for LPs to manage their PE portfolios. As the Montana deal shows, LPs can shift out existing LPs who don’t plan to move forward with the GP in the next fund. In this case, the existing LP can sell its interest in the prior fund to a buyer who plans to move forward with the GP.

This type of transaction is especially popular today, when secondary-market prices are high and as the PE-fundraising market approaches record levels. The average top price for leveraged buyout funds for the 90 days to June 30, 2017, was 94.67 percent of net asset value, according to intermediary Setter Capital.

Action Item: CIVC’s Form ADV: http://bit.ly/2uvUjC3

Austin Freer plays the violin in camp after the wranglers gathered approximately 350 horses during Montana Horses’ spring drive outside Three Forks on April 22, 2011. Photo courtesy Reuters/Jim Urquhart