Firm: Gryphon Investors Inc.
Fund: Gryphon Partners 3.5 (possibly)
Target: $350 million
Firm: Terra Firma Capital Partners Ltd
Target: €1 billion
With fundraising still wobbly from its post-recession funk, buyout firms are turning to bridge funds to provide interim capital and perhaps tide them over until the market becomes more favorable.
Across the pond, London-based
The moves could be a harbinger of a new phase in the industry’s response to the financial turbulence that has wracked global financial markets since the end of an economic boom period in 2007. Hammered by a fast-moving financial crisis, and now facing the threat of a renewed crisis, buyout firms first reacted by asking investors to extend their investment periods to deploy committed funds.
Gryphon Investors, which may call the bridge fund Gryphon Partners 3.5, already has established a fairly complex structure for Fund III. In addition to the main $415 million fund, its components include the $31.5 million
San Francisco-based Gryphon Investors invests mainly in small-cap and mid-market companies, targeting business services, consumer services and products, health care and education.
The British Terra Firma is currently investing out of
Terra Firma has notably stumbled, though, with portfolio company EMI, a British music publisher on which the firm lost £1.7 billion ($2.7 billion) when creditor Citigroup seized the deeply indebted company last spring. Such a black eye could complicate Terra Firma’s efforts to raise a full-blown successor fund.
Given the economic conditions of recent years, the use of tools such as bridge funds should not be surprising, said Siobhan McBreen Burke, a partner at the law firm Paul Hastings LLP in Los Angeles. “The market has been very turbulent.” The volatility has made it difficult for sponsors to achieve successful exits from their investments, Burke said. “Without having realizations, it’s hard to raise the next fund.”
And even though cash may run low in a fund, sponsors may still need capital to continue to invest in portfolio companies. Potential conflicts arise, however, if the bridge fund’s structure is not the same as the original fund, Burke said, but sponsors can minimize that risk by turning to prior LPs and investing the bridge fund into existing portfolio companies.
Another way to free up capital is by recycling at least a portion the proceeds from exits back into existing holdings, if the partnership agreement allows such arrangements, she said.