No hurdle, no problem for TA Associates

TA Associates closed its thirteenth fund last year on $8.5 billion in a strong fundraising process that wasn’t affected by the fund’s lack of a preferred return hurdle.

TA, like a handful of other funds in the market, also didn’t include a preferred return in its prior pool, sources told Buyouts.

Preferred returns are a hurdle, usually set at 7 or 8 percent, GPs have to meet before they start to collect performance fees. Limited partners see preferred returns as an insurance policy against having the GP collect a share of profits before it has generated a decent rate of return for backers.

One of the most notable firms to drop its preferred return was Advent International in 2015.

GPs may argue the hurdle can create situations unfavorable to the LP. If, for example, the GP remains well under the hurdle while running low on uncalled capital it may be tempted to swing for the fences with its last gasps of capital.

“Remember, the pref is only an interim return you get before they get into carry … If you feel they’re getting 8 percent for sure, the pref doesn’t come into play,” a source told Buyouts in 2015.

TA Fund XIII charges the standard 20 percent carried interest rate. Its management fee “varies by year,” but averages 1.65 percent of what is committed over the fund term. That is slightly below the 2 percent industry standard, according to information posted on the website of the State of South Carolina Retirement System Investment Commission.

LPs included many top pensions, according to data from sister title Private Equity International.

TA was set to pledge 5 percent of aggregate commitments to the fund, up to $200 million. A source told Buyouts that could actually be as high as 8 percent.

TA typically invests in about 50 portfolio companies. It tends to target companies ranging in value from $200 million to $1 billion with investments between $75 million and $400 million. Its sectors of interest include technology, healthcare, consumer, financial services and business services.

The South Carolina documents also provided information on TA’s previous fund performances. All of TA’s previous funds save one have finished in the first or second quartile for their vintage years.

Only one TA fund has performed poorly. TA’s tenth fund, TA X, which the South Carolina documents give a 2006 vintage, had only a 1.30x TVPI and was in the bottom quartile. According to LACERA documents, that fund had a 5.2 percent internal rate of return.

TA chairman and managing partner Brian Conway referenced this in a recent interview with Buyouts. He said the firm had a “tough fund” due to the 2008 global financial crisis and “some mistakes” made by the firm.

“We’ve come back very nicely since then,” he said.

TA Associates declined to comment for this story. The firm recently closed on a separate fund that doubles-down on existing TA investments, Buyouts reported.

Action Item: read the State of South Carolina commission report on TA XIII here.