In 2014 I wrote about the wind-down of Paul Capital, and how the veteran private equity fund-of-funds manager was continuing to charge full fund management fees despite having laid off nearly all its employees and shutting five of its six offices.
Now we’re learning that the column set off a chain of events that today culminated in an announcement that Paul Capital has agreed to an institutional liquidity plan with The Beneficient Company, which includes an immediate cessation of management fees and repayment to LPs of nearly 50% of all fees paid over the past two years for the firm’s eighth and ninth funds (whose remaining combined NAV is around $600 million, with a lot of complex structure mixed in).
In more formal terms, Beneficient is essentially underwriting a contingent value right on Funds VIII and IX (a smaller Fund X was already wound down via traditional secondary sales).
“I called [Paul Capital’s] David de Weese when I read about the fees and said ‘What I’m reading isn’t you,'” says Brad Heppner, founder and CEO of Beneficient Group. “So we met and David went through the strategic review they had been doing, I expressed my differences of opinion on some of it and said that our balance sheet could help in providing liquidity to LPs… But it was a long process, in which they went through a series of different options ― including traditional secondary auctions and selling the business piecemeal — before we got to where we are today, where we’re providing an NAV guarantee to the ultimate buyer of the assets.”
If Heppner’s name sounds familiar, that might be because he founded and led Crossroads Group, a private equity fund-of-funds and advisory business sold to Lehman Brothers via separate deals in 2003 and 2007. Since then he has been quietly building up Beneficient, a non-fiduciary that uses its balance sheet to both provide liquidity to alternative asset investors, and also provide administration services (risk management, etc.) On those assets.
To date the firm has primarily worked confidentially with institutional investors, including underfunded public pension funds that would prefer not to enter easily-leaked auction processes that would publicize their financial difficulties. But it also is moving into the individual market, with today’s Paul announcement actually secondary to news that Beneficient has agreed to acquire Provident Trust Group, an independent administrator and custodian of over $3 billion of self-directed retirement accounts for around 20,000 high-net-worth clients that are invested in alternative assets.
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The Provident deal ties into the Paul Capital transaction, in that seven Paul Capital professionals will join Beneficient as underwriting executives ― charged with helping to study the various underlying assets of Provident clients, and then helping to devise liquidity strategies. The job also should expand, as Heppner says he wants to quickly multiply Provident’s client base to around 200,000 (most likely via acquisitions).
As an aside, the capital pools of custodians like Provident is a holy grail for many private equity firms, which see them as one of the last untapped sources of new fund capital. The trouble has been getting direct access, but a balance sheet-based firm like Beneficient might be able to serve as the general marketing go-between because it isn’t a fiduciary or broker-dealer (at least not right now). Instead, it earns money via account administration and liquidity transaction underwriting.