Two Asian private-equity firms have merged through a new $700 million continuation fund using an increasingly popular deal structure that’s gained traction across the sector in recent years.
(Bloomberg) — Two Asian private-equity firms have merged through a new $700 million continuation fund using an increasingly popular deal structure that’s gained traction across the sector in recent years.
Singapore-based Capital Square Partners and Basil Technology Partners have combined to form a new company, also known as Capital Square Partners, to deepen their technology services focused investments. The deal is the first of its kind in the region, according to Sanjay Chakrabarty, a partner at the new firm.
UBS Private Funds Group advised on the transaction that was structured through a so-called continuation fund mechanism, which private-equity managers use to hold a portfolio company for longer. Through this secondary process, firms strip out one or more assets from funds, giving existing investors the opportunity to either cash out or roll over their commitments into the new fund.
The continuation fund, known as CSP Fund II, currently holds five assets and includes $250 million of fresh capital that could be used for follow-on investments in the existing portfolio or to acquire new companies, Chakrabarty said.
Fund Mechanism
Continuation funds have become increasingly popular with private equity firms in the US and Europe, and secondary buyers are raising capital to invest in them. Sponsor-led deals, through such structures, accounted for 46% of the $103 billion in secondary-market transactions in 2022, up from 33% of the $80 billion of total secondary transactions in 2019, according to a report from Evercore Inc. Overall, the secondary market fell from its previous high of $134 billion in 2021 as a tough market environment hampered fundraising, the report found. In a secondary deal, an investor buys an existing interest or asset from primary fund investors.
Valuing assets is always the trickiest part of these deals, Chakrabarty said. In this case, secondary investor HarbourVest Partners provided the valuation to ensure the pricing was transparent and fair, and co-led the deal with TPG NewQuest and Committed Advisors, which were investors in prior Basil funds, he said. HarbourVest also made the largest commitment to the continuation fund, Chakrabarty said.
The new firm combines Basil’s expertise in identifying and investing in early-stage companies in tech services with Capital Partners, which makes leveraged investments in mid-sized companies in the same sector, Chakrabarty said. He expects the fund to make another three to four new investments, with equity commitments ranging from $25 million to $150 million.
The firm is focused on three investment themes within technology. These include infrastructure support required in servicing the move to cloud; services for infrastructure security, and services to use data analytics for better decision making, he said.
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