Friday, February 04, 2005
Possible Idea for Shopkorn - "Warehouse" Fund
Goldman rides to Cypress' rescue
by Heidi Moore and Vipal Monga Posted 04:06 EST, 3, Feb 2005
Looking to remain active in dealflow as it raises its next fund, New York-based buyout firm Cypress Group LLC has asked Goldman Sachs Capital Partners, the private equity arm of Goldman, Sachs & Co., to invest money on its behalf.
Under an informal and nonexclusive "warehousing" arrangement, Cypress — which has already invested the bulk of its second fund and is raising its third — will continue to look for investments. But instead of investing its own money, sources said, the firm will offer the opportunities to GS Capital.
If GS Capital is interested, it will invest 100% of the equity in the new investment. But both Cypress and Goldman will get board seats and management control over the shared portfolio company. When Cypress closes its third fund, it will pay Goldman back half of the equity investment. GS Capital will not receive a management fee, sources said.
Private equity firms that are between funds often call on outside sources to finance their investments so they can remain active in the market. But warehousing with another firm is the least common option. The risk is that if a firm does not raise its planned fund, its white knight retains 100% of the equity investment and management control of the portfolio company.
But Cypress, sources said, is not expected to have that problem as it works over the next six to nine months to raise its third fund, which is expected to be about the same size as its $2.5 billion second fund. Cypress has already run through $2.2 billion of that fund, investing in 17 companies.
Sources said Cypress approached Goldman with the warehousing idea. The two firms recently worked closely together on their $1.17 billion acquisition of Cooper-Standard Automotive from Novi, Mich.-based Cooper Tire & Rubber Co. Cypress sourced the deal through its own network but did not have enough firepower in its second fund to make the $320 million equity investment entirely on its own. So Cypress' partners, led by president Jamie Singleton, invited GS Capital to put in half. Goldman Sachs was also among the four banks that raised $900 million in debt financing to push the deal through.
Cypress and GS Capital have not signed any documents formalizing details such as whether Cypress will pay GS Capital interest on its invested equity. In addition, the arrangement is provisional: If GS Capital doesn't like any of the investments that Cypress brings to it, GS Capital is under no obligation to invest. And Goldman will not invest in any auction bids on behalf of Cypress, as all ideas need to be proprietary, sources said.
Goldman's benefit in the arrangement is clear. Goldman's investment bank provides a lot of financing and advisory work to Cypress, and strengthening the relationship between GS Capital and Cypress will likely throw more of those mandates to Goldman's investment bank.
The relationship between Goldman and Cypress is already well-established and goes back to Cypress' founding in 1996. Goldman helped finance one of Cypress' first investments, in Detroit-based Franks Nursery & Crafts Inc. in 1997. Last year, Goldman helped finance Cypress's $1.1 billion buyout of Toledo, Ohio-based auto parts company Dana Corp.
Although Cypress' first fund was underwater for some time after it finished investing, the fund has since recovered. Sources said Cypress' initial $1 billion fund has earned $1.3 billion for the firm. The sources added that it's too early to gauge returns on the second fund.
For private equity firms between funds, more common arrangements include having a group of deep-pocketed investors, such as the investment bankers at a firm that has a private equity fund, buy the assets and then, when the new fund is raised, transfer the assets back and recoup the cost of the investments plus an interest charge. In another arrangement, the prior fund buys the assets on behalf of the new fund, and then transfers them back at the end of the fundraising period.
Representatives for Goldman and Cypress both declined to comment.
— David Carey contributed to this report
by Heidi Moore and Vipal Monga Posted 04:06 EST, 3, Feb 2005
Looking to remain active in dealflow as it raises its next fund, New York-based buyout firm Cypress Group LLC has asked Goldman Sachs Capital Partners, the private equity arm of Goldman, Sachs & Co., to invest money on its behalf.
Under an informal and nonexclusive "warehousing" arrangement, Cypress — which has already invested the bulk of its second fund and is raising its third — will continue to look for investments. But instead of investing its own money, sources said, the firm will offer the opportunities to GS Capital.
If GS Capital is interested, it will invest 100% of the equity in the new investment. But both Cypress and Goldman will get board seats and management control over the shared portfolio company. When Cypress closes its third fund, it will pay Goldman back half of the equity investment. GS Capital will not receive a management fee, sources said.
Private equity firms that are between funds often call on outside sources to finance their investments so they can remain active in the market. But warehousing with another firm is the least common option. The risk is that if a firm does not raise its planned fund, its white knight retains 100% of the equity investment and management control of the portfolio company.
But Cypress, sources said, is not expected to have that problem as it works over the next six to nine months to raise its third fund, which is expected to be about the same size as its $2.5 billion second fund. Cypress has already run through $2.2 billion of that fund, investing in 17 companies.
Sources said Cypress approached Goldman with the warehousing idea. The two firms recently worked closely together on their $1.17 billion acquisition of Cooper-Standard Automotive from Novi, Mich.-based Cooper Tire & Rubber Co. Cypress sourced the deal through its own network but did not have enough firepower in its second fund to make the $320 million equity investment entirely on its own. So Cypress' partners, led by president Jamie Singleton, invited GS Capital to put in half. Goldman Sachs was also among the four banks that raised $900 million in debt financing to push the deal through.
Cypress and GS Capital have not signed any documents formalizing details such as whether Cypress will pay GS Capital interest on its invested equity. In addition, the arrangement is provisional: If GS Capital doesn't like any of the investments that Cypress brings to it, GS Capital is under no obligation to invest. And Goldman will not invest in any auction bids on behalf of Cypress, as all ideas need to be proprietary, sources said.
Goldman's benefit in the arrangement is clear. Goldman's investment bank provides a lot of financing and advisory work to Cypress, and strengthening the relationship between GS Capital and Cypress will likely throw more of those mandates to Goldman's investment bank.
The relationship between Goldman and Cypress is already well-established and goes back to Cypress' founding in 1996. Goldman helped finance one of Cypress' first investments, in Detroit-based Franks Nursery & Crafts Inc. in 1997. Last year, Goldman helped finance Cypress's $1.1 billion buyout of Toledo, Ohio-based auto parts company Dana Corp.
Although Cypress' first fund was underwater for some time after it finished investing, the fund has since recovered. Sources said Cypress' initial $1 billion fund has earned $1.3 billion for the firm. The sources added that it's too early to gauge returns on the second fund.
For private equity firms between funds, more common arrangements include having a group of deep-pocketed investors, such as the investment bankers at a firm that has a private equity fund, buy the assets and then, when the new fund is raised, transfer the assets back and recoup the cost of the investments plus an interest charge. In another arrangement, the prior fund buys the assets on behalf of the new fund, and then transfers them back at the end of the fundraising period.
Representatives for Goldman and Cypress both declined to comment.
— David Carey contributed to this report
# posted by Tom @ 9:59 AM 
