A New York private-equity firm has found a creepy way to revive one of its near-dead funds.
Behrman Capital is forming a new fund with a six-year life span to buy out an old $1.2 billion fund it closed back in 2001.
The move will allow the firm, founded by brothers Darryl and Grant Behrman, more time to sell out its remaining investments and collect fees and commissions.
Behrman is venturing into a graveyard of “zombie funds” whose time has run out. Rather than let them die, some PE firms are looking at novel (some say horrifying) ways to resurrect the aging funds and continue to profit from them.
Critics of such maneuvers — mainly investors who say it’s time to return their money — believe it’s just another way for firms to tie up assets and reap hefty fees.
The issue is hitting close to home. In April 2000, the New York State Common Retirement Fund, the state’s biggest pension, invested $100 million in the $1.2 billion Behrman fund. As of March 2011, the end of the state’s fiscal year, the pension fund had collected $107 million from its investment but still had $65 million in assets tied up with Behrman, according to the pension fund’s own data.
Eric Sumberg, the spokesman for New York State Comptroller Tom DiNapoli, declined to comment.
Behrman’s new fund will be comprised of five holdover companies from the old fund, including Ark Holding, an owner of long-term health-care facilities. Behrman values those remaining assets at around $750 million.
Jedd Wider, partner in Morgan Lewis & Bockius’ private-investment funds practice, said most PE firms in Behrman’s shoes would try to accommodate their investors since they hope to raise money from them again for subsequent funds.
Behrman, still run by the surviving brother Grant, is among a growing number of exceptions, according to Wider. As a result, the Securities and Exchange Commission is scrutinizing so-called zombie funds.
PE firms, which buy and flip companies for a profit, usually have 10 years from the time they close the fund to make their investments before returning money to investors.
The firms typically have a 2/20 fee structure. They collect a 2 percent management fee on the money raised, and 20 percent on any profits after the fund hits a specified rate of return.
If the clock runs out on a fund before it clears that hurdle, then the firm stands to lose out on further fees and commissions.
Not surprisingly, this has given them a powerful incentive to figure out how to keep these funds alive.
In Behrman’s case, they have told investors they can either get on board with the new fund or accept the firm’s offer to buy them out based on its $750 million valuation.
Experts say this presents a potential conflict of interest as the PE firm is motivated to buy investors out at the lowest price possible, since they can make commissions in the new fund.
Behrman did not return calls seeking comment.
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