Montana Capital Partners re-entered the fundraising space with their fourth secondaries fund, Opportunity Secondary Program IV (OSP IV) in April 2018. Having only been on the road for five months, the firm managed to raise almost double the capital (€800m) it received for Fund III (€406m), going against the grain of one of the main LP concerns at the moment around dramatic hikes in vehicle size. PE Map explores how the Swiss-based GP managed to justify such a steep incline.
Montana’s established secondaries strategy focuses on the specific niches at the smaller, more complex end of the market. The firm proports to give investors access to secondary investments which are under the radar of the typically larger secondary vehicles, and therefore able to provide LPs with increasingly attractive returns in the process.
Christian Diller, partner and co-founder of Montana tells PE Map this avenue of the sub-asset class which the firm targets is “the differentiator” between the other larger players in the market. “We very often source these smaller and complex deals directly,” he says.
According to Preqin, 2017 was a record breaking year for secondaries fundraising, with 30 vehicles holding a final close, securing a combined total of $37bn. This figure tops 2016’s also record-breaking $27bn.
While the secondaries market has certainly attracted vast amounts of capital, according to Diller, this has not resulted in major competition for Montana while raising its latest fund. “We don’t feel such a competitive pressure in the market.”
Indeed, Preqin stats also reveal that of the capital raised last year, 72% was for funds targeting North America, and 28% for Europe. This provided Montana’s latest offering with another competitive advantage as it aims to deploy capital with a 40%-50% divide between the US and Europe.
When Montana kicked off its fundraise back in October 2017, it started off by having conversations with existing investors to get the momentum going. Marco Wulff, also partner and co-founder of Montana says, “They are the ones who know us very well and can also act quicker.” Montana then extended talks to selected investors the firm already had long-term relationships with, before broadening their search to new LPs for the remaining capital, whose conversations and relationships had to be built during the process.
Unlike other GPs, Montana’s team structure varies to those of a typical PE house. “We don’t have a specialized investor relations team,” explains Wulff.
“Fund IV was raised by the senior team,” he adds; the same team which has proved successful for all Montana’s previous secondaries vehicles, expanding steadily over the years since the firm was founded in 2011.
Fund I counted 10 institutional investors, Fund II 11 LPs and Fund III had 14 investors. This latest Fund IV nearly doubled this number, receiving capital from 25 LPs. “An €800m fund with 25 institutional investors – that’s still a relatively concentrated investor base,” says Diller. “We also had a targeted approach in finding our new investors, which enabled us to continue building a high-quality investor base”.
Small is beautiful
As demand for private equity continues seemingly unabated, LP concerns over dramatic increases in fund sizes are emerging.
Montana’s Fund IV is not only the biggest fund yet for the firm, but it also comes with a longer investment period. “Fund III had a three-year investment period, and Fund IV has a four-year investment period” comments Diller. “This means we also have more time to invest the fund. This is one reason why we don’t consider it doubled in terms of investment size”.
While OSP IV is technically almost double its predecessor, Montana has steadily been increasing its fund sizes in tandem with its invest periods to account for the hikes. “We had a one-year investment period in our first fund – here we invested the €83m in one year. Our next fund – a €103m programme – was also deployed in one year. With our €406m Fund III, the rate of deployment was around €140m per year (€170m taking co-investments into the account) because of the three-year investment period. Now we intend to invest around €200m per year for this fourth fund.”
According to Wulff, Montana has worked with co-investors over the years.
“We have also broadened our sourcing spectrum over the last few years. We sourced deals directly from Asia, the Middle East and the US, not only in Europe.
“These four elements: a longer investment period, provided co-investments to our investors before, a broader, geographical sourcing approach, and the built-out of an increased experienced senior investment team, allows us to invest the €800m fund, or €200m per year,” explains Wulff.
Another reason for increasing the fund’s investment period was to bring Montana’s strategy in-line with the broader secondaries market. “Our reason for prolonging it was that this time period is considered as the typical investment period for secondary funds,” Diller explains, “The idea is to keep it at the standard of four years.”
This longer process will complement the fund’s traditional 10+1+1 lifespan and market standard terms and conditions.
Another interesting feature of this newly-raised fund is it’s GP commitment, which came in at 2%. “The GP commitment aligns us with our investors. That’s why we want to commit an amount higher than the legally required amount. Hence, we wanted to be above 1%,” explains Diller.
Montana makes the decision for the level of its GP commitment to each fund separately. “This worked out for all of our funds so far. In all of them we had a GP commitment of around 2-3% of the target fund size,” he adds.
While Montana itself is based in Switzerland, the firm decided to go against the trend The Drawdown has noticed of funds, particularly UK and European ones, domiciling in their European base, or in Luxembourg. Instead, Montana has continued to domicile all its four funds in Scotland – including this latest OSP IV – showing everything is still “business as usual” despite the impending Brexit.
“Scotland and Luxembourg provide typical GP/LP structures for private equity funds,” comments Wulff. “We decided in our first fund to go for the Scottish solution and kept it since then,” he says.
Even with the uncertainty caused by Brexit next year, Wulff confirms the firm will continue to use Scotland for domiciling “as long as there is no change in the regulatory environment.
“We would make it easy and simple for our investors and would just continue our Scottish structure.”
Despite the quick raise, broadened LP-based and larger fund size, OSP IV didn’t come without its initial challenges.
Diller says, “To get the fourth fund kicked off and to provide some momentum to investors is certainly a challenge at the beginning of the vehicle launch. For this fund it worked out very well because of our track record, having closed all our previous funds at their hard-caps and Fund III even in a first and final close. Getting momentum was easier.”
Albeit a nicer problem to have, it was dealing with too much demand that became Montana’s greatest difficulty. According to Diller, as the fundraise reached its final stages: “Due to large demand from new investors, Fund IV was highly oversubscribed in the final close”. This meant partners were forced to have tough conversations with LPs: “a cut-down of investors’ commitment sizes is also not a nice situation to be in.”