Over the past six to nine months, Seward & Kissel has seen “very strong” demand for both seed and ’”accelerator” deals, essentially a sped-up seed transaction for an established manager whose fundraising has plateaued and is accepting the equivalent of a seed deal in an attempt to jump-start its business.
”The first half of the year has been a markedly stronger environment for seed deals—we see activity up at least 50 percent over the same period last year and up perhaps 60-70 percent over the same period two to three years ago,” Grossman said in an interview conducted via email.
Grossman, a partner at Seward & Kissel, said his firm’s sizeable presence in the alternative asset management industry gives it ”a tremendous amount of experience” in all facets of emerging managers.
“We are uniquely positioned to advise them on how to craft a deal that will accommodate the interests of the ‘seeders’ while still preserving an attractive investment opportunity for investors,” he said. ”There are a myriad of complex tax and regulatory issues which need to be appropriately handled to ensure that no unpleasant surprises arise as the fund transitions from a new venture to an established business.”
A true spin-off from an already-established private equity firm has the potential for a protracted negotiation around deferred carried interest, restrictive covenants, portability of track record and performance, revenue share arrangements and other issues.
“We pride ourselves on our business practicality and efficiency in getting these deals done,” he said.
In a classic seed deal, an investor allocates $50 million to $200 million to a start-up fund manager. In connection with that allocation, the seed investor takes a 15 percent to 25 percent gross revenue share of the management fees and performance allocations/carried interest derived from the fund and in many cases, some or all future funds. On the private equity side, a seed investor gets certain kick-out rights and/or termination of commitment period under certain circumstances.
In addition to the large check, the seed investor may provide fundraising assistance along with its endorsement of the fund manager. In return, the new fund manager will be able to start their business with a successful launch and the scale it needs to meaningfully execute its strategy as a serious market participant; it also will earn sufficient management fee income to build out its infrastructure and operations.
Looking ahead, spin-out firms seem to be a growing segment of private equity, as they are among other alternative asset managers.
”Much of this is driven by a combination of factors including: portfolio managers’ desire for autonomy in wanting to run their own shops, investment and capital-raising opportunities in sectors run by such portfolio managers, and less conflicts and other sorts of trading restrictions that might stifle trading,” Grossman said.
By Steve Gelsi
(This story has been updated to fix a typographical error in the name Seward & Kissel LLP)