Many private equity funds formed during the “golden era”, prior to 2007, are approaching the contractual end of their initial expected investment horizons, which has created liquidity needs within such funds. To address this need, fund managers have elected to either restructure existing funds by extending expected fund longevity, or moving assets from existing to either (i) other funds under its management or (ii) newly formed funds. Managers are seeking to accomplish this restructuring while providing liquidity options for investors that are looking to monetize their positions. At Houlihan Capital, we expect this restructuring trend to continue for the next several years. Further, these restructuring transactions have been receiving increased scrutiny from the Securities and Exchange Commission (SEC). The SEC has been very open about closely monitoring the creative solutions that funds implement to make sure they don’t violate any federal securities laws and to ensure that fund managers use full disclosure and make any conflicts of interest known to investors throughout the process.

When restructuring, or moving assets between funds, valuation becomes a critical component. Not properly addressed, valuation of the underlying illiquid assets may potentially lead to conflicts between investors and management. By addressing such valuation issues up front, such conflicts can be mitigated. Best practice would dictate that an independent valuation be obtained when moving assets between funds. In addition, obtaining a fairness opinion provides further protection to both fund managers and investors alike.

An example transaction – A Company redeemed its preferred stock plus accrued and unpaid dividends, in addition to associated warrants, held by Fund A for $XXX. In conjunction with this Transaction, and to finance the Transaction, $XXX of senior subordinated notes, along with detachable warrants to purchase additional equity, would be provided to the Company by Fund B, another fund managed by the same management company (“Management Company”) as Fund A. Houlihan Capital provided a fairness opinion to the Management Company and its Advisory Board that the Transaction was fair, from a financial point of view, to the limited partners of Fund A.

Houlihan Capital has extensive experience in providing independent valuations and transactional opinions (fairness and solvency) for fund managers. We are SOC-compliant, demonstrating our commitment to the highest quality industry standards.

If Houlihan Capital can be of help in your restructuring, please contact:

Paul Clark
Managing Director
(312) 450-8656
pclark@houlihancapital.com