Start-up wants to support GP employees with 401k-style offering

Emerging manager Henry Capital is raising capital for an investment opportunity meant to boost private equity firm employees’ ability to make LP commitments to their own funds.

The new firm plans to offer employees matching contributions on their commitment amounts, a benefit that resembles 401k plan matching contributions.

The offering appears to be unusual, based on observations of the founding team.

“To our knowledge nobody offers a matching benefit like ours,” co-founder Austin Brady says.

Henry Capital was founded in January, with Austin Brady’s brother, Chris Brady Jr and Martin Urdapilleta as co-founders. Austin Brady and Urdapilleta were also classmates at Yale University.

Chris Brady describes the product as an “employee co-investment benefit program.” He says the matches will be made in dollar-for-dollar amounts.

“This is a new concept, so people are trying to wrap their heads around it,” he notes. “So we figure, let’s keep it fairly simple.”

At a time when landing and keeping talent is a challenge, offering a match could help GPs stand out.

“We’ve heard from pretty much every GP we’ve talked to that they look at this as a recruiting and retention tool,” Chris Brady says.

Each founder has professional experience in financial services.

Austin Brady worked at the family office of his grandfather, former US Treasury Secretary Nicholas Brady. Prior to that, he probed financial crimes while working in the private intelligence space.

Chris Brady began his career working on technology transfers between the US military and private companies. His early work came in handy when he joined a group that founded a venture capital firm called Chart Venture Partners, which specialized in dual-use technologies.

Urdapilleta spent time at buyout firm Genstar Capital, where he participated in its employee co-investing program. His background helped to inspire Henry Capital’s matching product. At Genstar, he would invest the maximum allowed in the company’s deals, his biography notes.

But Urdapilleta faced short-term liquidity challenges because his invested amounts would exceed his paycheck, and he didn’t have any luck with “the usual suspect banks” that could provide liquidity.

“The liquidity products out there are not available to everybody, and even if they are, and they don’t always work for everybody,” he says.

The match is one of two products that the firm will offer. The other is a preferred equity offering to help GPs make commitments to their newer funds.

Filling a void

Employee investment programs aren’t new in private equity.

“It’s fairly typical for private equity firms to offer their employees the opportunity to invest either in the fund or co-invest along in each deal,” Chris Brady says.

But Henry Capital’s match contrasts with existing offerings that have drawbacks. These options rely on leverage or have restrictions that employers attach.

Banks have offered leverage to employees that is collateralized by the GP’s management fees or carry, Chris Brady says. Using employers’ resources as collateral is done to reduce credit risk.

The leverage is floating rate and thus more expensive in the current higher-rate environment, Austin Brady notes. A floating rate also makes payments less predictable.

“It’s not that great when that’s a surprise payment,” he says.

Another approach is for GPs to offer phantom carry to employees, which Chris Brady says is discretionary profit sharing. But he notes that phantom carry is often clawed back when employees leave their firms, and it does not get the relatively favorable capital gains tax treatment.

Henry Capital’s product uses a distribution waterfall, while matches given aren’t clawed back.

The firm collects 75 percent of distributions on employee contributions and related matches until the fund completes a 1.0x distribution, Austin Brady says.

Employees keep all of the distributions once that threshold is achieved, but Henry Capital then gets a cut if distributions cross 2.0x. Austin Brady notes this figure is “a small portion,” or under 25 percent.

“The end result is that as long as the fund does better than a 1.5x gross, the employee’s returns will be higher than if they had not used us,” he adds.

Chris Brady says that employees who leave their GPs prior to the conclusion of their capital calls will get to keep their invested principal and related matching amounts. However, they will forgo participation in uncalled capital and the matching funds tied to it.

The firm will leave it up to each participating GP to decide which of its employees can participate, Chris Brady says, with the caveat that they must be accredited investors.

Funding the match and more

Henry Capital is in the market with an investment fund to raise the money it needs to launch the matching product. The vehicle is called Henry Capital Fund I LP and may take shape as a closed-end fund, Austin Brady notes. His brother says that they have a $50 million target for the vehicle.

Henry Capital will also use the fund to back its preferred equity product, Austin Brady says.

Seven private equity firms have signed up as customers so far, he notes. Henry Capital is focusing on landing investors for the fund.

“While we will continue to sign up GPs to partner with, we have enough customers to start bringing in investors,” he notes. “We have a few hard commitments and are following up on our soft commitments.”

The firm will limit its match amounts to each GP’s employees based on portfolio sizes at the fund level.

“We want to have enough diversity across our fund,” Chris Brady says.

The preferred equity will let GPs tap their investments to generate liquidity to meet commitments to their newer funds.

“Our preferred equity product allows GPs to unlock value from illiquid investments while still retaining ownership, thereby maintaining flexibility and preserving upside,” Chris Brady notes.

All of Henry Capital’s initial customers are using the preferred equity offering, which is the firm’s more immediate priority due to customer interest, Austin Brady says.

“We have decided to focus on this product for our first deployment as there is extreme demand in part because exits are being pushed further to the right. The co-invest product will be offered in the future to these same funds.”

The preferred equity will come with a 12.5 percent preferred return and require GPs to give Henry Capital 75 percent of distributions until its principal is repaid, Chris Brady says. The investment self-liquidates once the firm is fully paid on its initial capital and its return.

Preferred equity has fewer restrictions than credit and is relatively more attractive now due to higher interest rates, Chris Brady says. His brother points out that it comes with a fixed rate as opposed to a floating one.