Secondary PE Fund Acquirer Kline Hill Maintains Quick Deal Pace

Kline Hill Partners founder Michael Bego sees ample opportunities in 2021 after the firm deployed about a quarter of its latest flagship secondary fund during the Covid lockdown last year.

• September 21, 2021

by Steve Gelsi

Kline Hill Partners LP founder and managing partner Michael A. Bego expects the firm’s quickened investment pace to continue for the balance of 2021, as a specialist in middle-market stakes in private equity funds.

The Greenwich, Conn.-based firm expects to complete 70 to 80 transactions this year of stakes in private equity funds typically aged six to 15 years old. That’s up from a pace of about 60 two years ago, and in line with the firm’s 77 transactions in 2020.

Kline Hill looks to buy private equity fund interests, often at a discount to net asset value, and then realizes gains when a company in a particular PE fund gets sold or goes public. As in any PE fund, secondary funds receive carried interest payments, or a share of profits, when their investments generate returns that meet thresholds and after investors have received all of their capital back with 8% cash return on top.

Kline Hill Partners continues to invest out of its third flagship fund, Kline Hill Partners Fund III LP, which raised $450 million in April 2020, plus a $150 million overage fund for larger deals.

“Our fund is acquiring similar assets to what the big secondaries firms are buying, but we just write smaller check sizes,” Bego told The Deal. “Whenever big institutions clean out aging fund holdings for administrative reasons or to boost their own track record, we’ll often buy them.”

Despite a downdraft in secondary PE activity during the Covid-19 lockdown of 2020, Kline Hill stepped up its activity when the pandemic hit. The firm ended up committing about 25% of Fund III from March through June 30 of last year.

To screen its investments during this rocky time, Kline Hill used a Covid-19 scoring methodology to gauge exposure to the pandemic.

“Companies such as Zoom and Peloton drew higher scores, and cruise line operators and hotels companies got a lower score,” Bego said.

Using this approach, the firm was able to buy up smaller fund stakes despite jitters in the market last year.

Unlike larger secondary market players such as Coller Capital Ltd., Lexington Partners LP or Landmark Partners Inc., Kline Hill targets small transaction sizes of below $5 million in AUM and as high a $100 million in AUM on the larger side. Some of those smaller deals may be in larger PE funds.

Kline Hill’s traditional business has been buying PE fund stakes from limited partners. A newer type of deal involve general partners — private equity firms — that sell stakes in their funds. Kline Hill has been seeing opportunities for this second deal type, particularly with PE funds that invest in the technology sector.

Looking ahead, Bego sees potential for other new deal types such as secondary transactions involving a single company, with Kline Hill buying out investor stakes in a specific platform company.

But the firm’s bread and butter remains working with institutional LPs, banks and pension funds that want to wind down old bundles of fund stakes or pare down their roster of PE managers in their portfolios.

Bego declined to name any of his transactions by name given the confidential nature of the deal type.

“Let’s say you’re a new chief investment officer at a fund,” Bego said. “You show up at a big institution and a third of the funds are in old stuff that won’t appreciate enough. It’ll weigh down your performance. You don’t want those things, but you can get a honeymoon discount and sell those to a secondary fund.”

Looking ahead, Bego said the firm could handle more than 100 deals per year in the next couple of years.

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