Solutions for Managing out Your Legacy Portfolio

As a result of the Global Financial Crisis, many successful GPs, including those who have recently raised new funds, are still managing legacy funds from vintages within the 2005 to 2009 timeframe. Typically, these legacy portfolios contain a few tail assets that have held back the sponsor because they have underperformed, are in need of more capital or were simply acquired later in the fund’s life cycle. In most of these cases, GPs have either contemplated or been approached by secondary agents about a “quick fix” solution for disposing of these assets. We are all familiar with traditional secondaries and therefore lean on those as a “cure-all”; secondary sales are not always the right approach and are definitely not the only option. A structure that Sixpoint’s secondary team recently completed enabled the manager to hold on to the assets and support it through a fund-level dividend recapitalization. What does this mean? What are the advantages to you as the sponsor? How was the transaction structured?

What is a “Fund Level Recap?”

Sixpoint was able to recapitalize the fund with a significant cash infusion structured as a preferred equity interest. This innovative structure enabled the manager to use the proceeds to fund a distribution to LPs while supporting the legacy fund’s remaining portfolio companies, accomplishing the key priorities for each of the counterparties. In this transaction, the existing LPs were able to remain in the fund as “common equity” interest holders and the original distribution waterfall remained intact, subject to the preferred equity’s seniority. As a result, the existing LPs and the GP (through carried interest) receive the remaining distributions from the portfolio. It was an elegant solution to a successful manager with legacy portfolio needs.

What are the advantages of alternative secondary structures?

Flexibility. Sometimes a manager’s best option is to hold on to the legacy assets – permanently (or for an extended time horizon.) A traditional secondary buyer would NOT however be the appropriate audience for a long-dated transaction. By offering alternative structures around fees, duration and exit ramps along the way, you can attract a truly long-term partner that can help you maximize terminal value for assets that would otherwise be sold prematurely. Sixpoint can help you identify and select the right kind of partner for each such transaction.

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