Kensington Capital Advisors Inc., the manager of Kensington Private Equity Fund, has proposed to update the terms of the fund to expand the types of financial returns that may be distributed to investors with a corresponding performance fee payable to the manager in such circumstances.
A special meeting of the fund unitholders (class A, E, F, G units) has been called and will be held at 8:30 a.m. (Toronto time) on December 8, 2017 at 1 First Canadian Place, Suite 6300, 100 King Street West, Toronto, Ontario to consider and vote upon the proposed change.
Kensington Capital said since the fund’s investment strategy is to buy and sell companies, the performance fee was structured to be calculated based on the distribution of net realized gains from successful sales of such investments. As the portfolio has developed over time, Kensington has found this formulation to be too limiting as many private equity investments are structured to create profits for investors while the investments continue to be held within the portfolio.
Kensington Capital listed two examples to make the case of changing performance formula for the fund.
- An investment may be structured to pay interest, dividends, or fees to investors in addition to generating capital gains. If the fund pursues an investment using this type of structure, these amounts represent additional income that should be paid to the fund’s investors with a corresponding performance fee to the manager, but do not currently qualify under the fund’s current formulation.
- Even when a portfolio company is performing well, it may not be appropriate to sell it. Many private equity firms recapitalize their strong companies with debt in order to pay special dividends to their investors and extract profits, while continuing to hold the company for additional growth in the future. Under the current structure of the fund, the manager is not aligned with this strategy since special dividends would not qualify as net realized gains eligible for a performance fee.
The performance fee payable to the manager is currently calculated based on distributions to unitholders of net income and of net realized capital gains, determined based on definitions in the Income Tax Act (Canada).
Kensington Capital said this formulation is not sufficiently broad to effectively include payments of interest, dividends or other income. Accordingly, It proposes to update the basis upon which the performance fee is calculated in order to align it with the full range of payments that may be generated from the portfolio and distributed to investors in the fund. The amount of the performance fee will not change and will remain that amount which results in the manager receiving 10% of the sum of the total amount paid to investors as gross cash distributions.
Kensington Capital said it has a unique “permanent capital” structure that allows the manager to hold these companies indefinitely, without the artificial pressure to sell faced by most private equity firms with a fixed term. In order to effectively pursue this approach, the manager requires a full range of financial tools to generate interest, dividends, fees or other amounts that can flow through as distributions to investors. It is therefore necessary to update the terms of the fund to maintain the alignment between investors and the manager across these strategies.
Kensington Capital Advisors is principally owned by Thomas Kennedy (33%), Richard Nathan (33%), and Eamonn McConnell (11%).
photo credit: Kensington Private Equity Fund