Kline Hill finds ample small secondaries opportunities for new fund in downturn

Kline Hill Partners has kept busy through the downturn, even as other secondaries buyers stepped back during the pandemic as markets locked up.

Kline Hill, formed in 2015 by ex-Willowridge Partners executive Mike Bego, is investing its third fund, which it closed in April on $450 million. The firm also raised a $150 million overage fund that it says is needed for the crush of opportunities it sees in the part of the market on which it focuses, which is generally small secondaries deals from $1 million to $10 million.

“Our deal flow is about the same as it always had been. We’ve kept investing the fund after a brief pause during the biggest part of the crash,” Bego said. “We’ve done 20-plus deals since the markets tanked.”

Fund III is about 20 percent deployed, Bego said.

Deal flow has come from opportunities the firm was exploring before the downturn, as well as from sellers who “are not price sensitive,” Bego said. Some sellers the firm has worked with have been distressed for various reasons in the downturn, including those who need “more cash on the balance sheet,” Bego said.

“When you have this kind of turbulence, you have people looking for liquidity, GPs looking to shore up their investor base, companies looking for more capital in older funds,” Bego said. “It’s challenging to go to an old investor pool for extra capital, so that’s where you want to partner with someone like Kline Hill to restructure funds, breathe life into old assets.”

Secondaries volume fell precipitously in the first half of the year, compared to prior years. Total volume is estimated around $18 to $20 billion, according to recent volume reports.

Prevailing market sentiment today is that GP-led transactions are going to become even more popular as the market moves through recovery. Exit activity will likely be subdued as GPs push off anticipated sales to wait for a better pricing environment. These situations will give rise to a need among GPs to find ways to hold assets longer, which should create a perfect opportunity for GP-led deals like fund restructurings and single-asset continuation deals.

Kline Hill, which has grown to 18 people since inception and plans to hire two more, plans to craft a formal strategy around GP-led deals, Bego said, without divulging details. The firm has pursued fund restructurings in the past, but sees the need for a dedicated focus on the opportunity.

“We see a huge opportunity in the GP-led deals that are probably only in the second inning of this huge GP-led movement that started a few years ago,” Bego said. “We see it expanding substantially. There weren’t a lot of new GP-led deals in the March/April time frame, but now we see a whole bunch coming online.”