Prime Edge, a new type of investment vehicle that is a cross between a traditional high yield collaterised debt obligation (CDO) and a private equity fund-of-funds, has achieved a closing of e150 million.
Depending on demand, the vehicle size may increase to e200 million by August 15. A joint venture including Capital Dynamics, acting as lead manager, RMF (Rainer Marc Frey) and Hamilton Lane Advisors managed the investment selection and risk management process for the fund.
Prime Edge offers institutional private equity investors and bond investors exposure to a diversified pool of private equity funds with a diversified level of risk. Thomas Kubr of investment boutique Capital Dynamics said: “The investor can choose the preferred risk level and can either have a levered performance or a performance similar to a fund-of-funds on the upper end, but with a principal protection on the lower end.”
Kubr believes this breed of fund is a structure we will be seeing more of and he expects to see an increasing number of funds tapping into the debt market to raise money.
The fund will focus exclusively on investments in Europe to avoid the complications of combining two currencies. (A second US dollar fund with a focus on North America will be launched in the near future.)
Investment focus will be diversified targeting countries and industries all over Europe in all types of funds. The net proceeds of the e150 million secured notes issuance will be invested in a diversified pool of private equity funds managed by a number of fund managers selected from 35 pre-determined European fund managers.
Kubr says the fund is likely to have committed to at least half a dozen funds by the end of June and hopes to commit to between 40 and 50 partnerships over the next five years with an average investment size of between e5 million and e10 million.
Deutsche Bank acted as arranger for the transaction and placed e105 million senior notes and e45 million junior notes. The senior notes are supported by a financial guarantee provided by Allianz Risk Transfer.
The notes have a stated maturity of 12 years. To the extent that assets remain in Prime Edge after the senior note holders have been redeemed, such assets will be distributed for the benefit of the junior note holders.
The return of the private equity funds is transferred through Belgian and Irish special purpose vehicles for tax efficiency. The structure of the fund avoids withholding taxes, says a source close to the deal. Little or no taxes are paid on the intermediary steps between the funds and the limited partners.