PEIs Latest Fund Builds New LP Base

Raising a new private equity fund is becoming a routine occurrence today. Raising a new fund while completely reconstructing a base of limited partners is a bit more challenging. That’s what New York-based secondary firm Private Equity Investors (PEI) recently did with the closing of its latest fund, the $170 million Private Equity Investment Fund IV.

The firm held a first close last year on $35.5 million (see Buyouts, Apr. 25, 2006). Private Equity Investors initially planned to close the fund before the end of 2005 and had set a stated goal of $150 million.

Prior to the formation of Fund IV, PEI’s backing came from three principal limited partners: investment banks BancBoston and JPMorgan Partners and San Francisco-based hedge fund Farallon Capital, which provided capital on a deal-by-deal basis. Because PEI had a focus on smaller secondary deals, both BancBoston and Farallon had side-fund agreements that gave the LPs the right of first refusal on deals larger than $5 million.

Those side-fund agreements meant that PEI was limited in its ability to raise additional outside funding for a stand-alone fund. The problem, though, solved itself, as PEI’s three LPs were either merged into other entities or ended their private equity programs altogether.

While PEI lost its anchor LPs, the firm was free from the restrictive side-fund commitments, making it a more appealing option to new limited partners.

Given the size of the fund, Private Equity Investors focused its efforts on smaller LPs such as corporations, endowments and family offices. Among its limiteds are clients of Cambridge Associates and the ITT pension fund. Approximately 95% of the LPs are U.S. based, while European institutions make up the balance.

Stanwich Advisors was hired as placement agent to market the fund. Charles Daugherty, managing partner with Stanwich, noted that the fund attracted investors that are relatively new to private equity and found the lower risk profile of the secondary market attractive.

He added that PEI’s steady investment strategy helped set the group apart from other secondary investors. “There are a lot of groups that started five to 10 years ago with smaller amounts of money and have more money now, and that’s forced them to change their investment strategy,” he said.

Traditionally PEI has focused on very mature, fully-funded portfolios, according to Daugherty. That generally translates into more efficiency in pricing and also leads to a shorter hold duration, which allows investors to pay less and generate returns at a quicker pace.

PEI does not have a co-investment agreement in place, but the firm would entertain such opportunities from Fund IV’s LPs, particularly if a deal includes assets it doesn’t normally invest in, such as real estate.

Managing Director Gunnar Fremuth told Buyouts that the firm has so far closed two deals from Fund IV, and expects two more to close by the end of May. The deals are primarily for portfolios of mixed venture and buyout fund interests.

PEI also has a corporate secondary program, PEI Corporate Ventures, that it runs in collaboration with corporate VC veteran and Israel Infinity Fund Managing Partner Kenneth Rind.

With a particular focus on more mature interests, PEI purchases buyout, growth equity, mezzanine and venture capital interests, usually with asset values less than $25 million. The firm has purchased more than 130 private equity funds, mostly based in the United States. PEI also operates two funds of funds that invest in both buyout and venture funds as a primary limited partner.

The firm, headed by Co-founders Charles Stetson and David Parshall, is based in New York and maintains offices in Chicago, San Francisco and Tokyo. — M.S.