Zombie Funds and Secondary Markets For Private InvestmentsVW Staff
As allocations to illiquid investments have grown over the last decade, so has the need for investors to manage their exposure to illiquid asset classes like private equity, private stock, and other thinly traded securities. There are firms that help provide secondary markets for illiquid offerings. This also ties into so called Zombie funds.
One firm that provides private equity secondary offering services is Alp Invest, based in Amsterdam. The firm facilitates return of capital before maturity or in restructuring a portfolio of private equity interests to meet certain goals outlined by the investor. Another firm that helps bring liquidity to non-liquid instruments is New-York based Second Market. The company provides a market in private company stock, thinly traded bonds (e.g. student loan secured loan bonds, auction rate securities), and private equity offerings.
Second market connects interested accredited investors – both individual and institutional – with entrepreneurs and sponsors of private offerings. Second market helps private company issuers retain more control over their strategy while providing investors with liquidity and information like a public company does. For investment funds, Second Market provides a streamlined approach to subscriptions and redemptions allowing the fund to provide liquidity to investors as determined by its guidelines. Finally, investors have the option to become angel investors in Second Market offerings, as well as access the myriad of opportunities the site offers once they register with the site and certify that they are accredited.
Firms That Want To Take Advantage Of Zombie Funds
Two firms that want to take advantage of the $100 billion market in “zombie funds” – underperforming private equity and hedge fund assets – are Crestline Investors and Kirchner Group. The two firms agreed to a joint venture on May 1 seeking to take over zombie funds from their sponsors. Merchant bank Kirchner and alternative asset manager Crestline are going to tap $1.9 billion and deploy it in opportunistic investments – which include purchasing hedge fund or private equity interests from investors. The new firm seeks to replace or complement general partners of funds, provide consulting services for limited partners, create successor funds by combining direct private equity investments into a fund structure, and raise capital at the portfolio level.
The Crestline-Kirchner Private Equity Group will be based in Fort Worth, Texas and will have offices in New York and Toronto. W.B. (Bud) Kirchner, who founded Birmingham, Alabama-based Kirchner Group in 1985, will lead the new business line of Zombie funds.
In a prepared statement, Kirchner said the partnership “provides tremendous validation” of his firm's business model. “Now is the right time for us to scale up to meet rapidly increasing market demand,” he said, adding that the deal with Crestline Investors will provide “institutional infrastructure and access to capital.”
Douglas Bratton, president and chief investment officer of Crestline Investors, said in a prepared statement that the new alliance would add a “powerful new business to our institutional platform” and tap into Kirchner Group's success “deploying its model across a series of portfolios ranging from early stage venture to mid-market buyout since 2004.”