YielCo holds closes for PE and co-investment funds

Fund-of-funds vehicle YielCo Special Situations Europe II has held a first close on €211m, against a €300m target. The firm's predecessor vehicle in its Special Situations Europe strategy held a final close in June 2019 on its hard-cap of €225m.

The GP also announced the launch of its debut co-investment vehicle: YielCo Defensive Investments is targeting €150m and was launched at the end of 2020. The co-investment vehicle will not target special situations or distressed deals.

K&L Gates is providing legal advice on both the YielCo Special Situations Europe II and Yielco Defensive Investments vehicles.

Asked about the timeline for raising YielCo Special Situations Europe II, María Sanz, partner and co-head of private equity, told Unquote: "We made the last investment from the previous fund in November, which was when we planned to launch the next one."

Sanz further explained the market positioning of YielCo's PE fund-of-funds strategy in the European market: "In the current market, you have expensive deals such as technology, healthcare, consumer staples etc, anything that has had good results during the Covid crisis. Those are very easy to sell," she said. "And on the other side, you have value situations where the buyer needs to apply a lot of operative measures to improve the business – in the first year, you really have to put a lot of work into the company to turn it around or bring it back to the way it was. These deals have EVs far below 8x EBITDA and are complex situations, which is where we focus."

The decision to launch a co-investment strategy came about in part as a result of potential dealflow that YielCo saw from its fund-of-funds relationships, Sanz said: "Our fund-of-funds only invests in primaries and secondaries, but not co-investments, although we had a lot of co-investment dealflow with managers in which we were a significant investor. We realised that we were missing out on these opportunities."

Manuel Deimel joined YielCo from SwanCap as head of co-investments in April 2020, as reported. Deimel told Unquote that the fundraising process for the new strategy began towards the end of 2020: "We did not market the Defensive strategy last year, we just discussed the topic with anchor investors from our existing relationships," he said. "We made a first close in light of our first transaction and kicked off broader marketing in spring this year."

YielCo also announced that its first Speciality Lending vehicle also held a first close on €126m against a target of €300m. The vehicle will invest in funds that provide businesses with asset-backed speciality financing, aiming to provide debt to companies that traditionally might not have access to such facilities. The strategy is differentiated from YielCo Private Debt, which closed in January 2020 on €325m and invests in senior direct lending and running yield strategies.

YielCo said in a statement that it intends to launch YielCo Private Debt II in H2 2021.

The Munich-based GP also announced that YielCo Special Situations II, the GP's North America-focused programme, has held a final close on its hard-cap of $455m. Its predecessor held a final close on $500m in 2018.

Investors
YielCo Special Situations Europe II is backed mainly by existing LPs, with two additional new LPs, and expects a strong re-up rate. New strategy YielCo Defensive Investments has launched with two LPs so far.

The LPs in both funds are German institutional investors, including pension funds and insurance companies. Both funds expect to have around 15-20 LPs in total and are expected to close by May 2022.

Investments
YielCo Special Situations Europe II has made three deals so far (two primary investments and one secondary deal) and has deployed around €66m. The fund also has five further deals in its pipeline, which are currently in due diligence. The vehicle expects to invest in 15 funds over three years and deploys equity tickets of €20-30m.

YielCo Defensive Investments has made three investments so far and is around 30% deployed. The vehicle has an equity ticket sweet spot of €10-15m and expects to have a portfolio of around 13-15 companies.

The fund makes small and medium-sized co-investments, targeting businesses that the GP considers to have comparatively low entry multiples, moderate debt levels and a high level of asset protection, giving them a defensive profile with high-risk protection.

Sanz told Unquote about the three investments that the fund has made so far: "The rationale behind the first deal was that a GP had been invested in a 'recommerce' business for two years, then another shareholder wanted to sell its stake," she said. "The GP had a call option on any stakes that would be sold at a very attractive price, but they did not have enough capital left in their fund. So we were able to buy the stake, and the deal is valued at almost 2x immediately after closing the transaction."

Sanz added that the Defensive fund's second deal was a carve-out from a major European consumer business and that the deal was valued at around 8x EBITDA, with no competition in the sale process. "The third deal was made with a GP that was invested in a company, but their anchor investor closed down its fund and wanted to sell its stake," she said. "We were able to offer a shareholder consolidation and restructuring."

Asked about what YielCo looks for in the managers in which it invests, Sanz noted that clear strategy and experience is important: "On the special situations side, we need to see a clear strategy around value, and teams with extensive operational experience who have invested in complex transactions in the past."

Sanz added that Special Situations Europe II will continue to focus on small-cap and mid-market strategies. The smallest fund in which YielCo invested via its previous Special Situations Europe fund was €50m. The firm does not generally invest in funds larger than €1bn, Sanz said. "We also invest mostly in country-focused funds," she told Unquote. "Europe is very fragmented in terms of the legal systems in insolvency laws, so there are not many players who can be active in several jurisdictions, although we do have a couple of pan-European funds."

Deimel explained that YielCo intends to draw on its existing relationships for co-investments, although it will also take on new opportunities and differentiated structures: "Around two thirds of our co-investment deals will likely come from our existing relationships where we are an investor. But we have a broad scope, and the other third will be from managers in which we are not invested. Selectively, we can also make one or two investments where we could go for deal-by-deal setup, if the deal is right and the partner is right. More and more people are doing this, and for these deals, you need to differentiate on partner quality, mirroring the fact that it is complex."

Deimel also noted that YielCo's fund-of-funds strategy puts the GP at an advantage in the market when it comes to co-investment dealflow. "We generally invest in small mid-market funds, but with tickets of €20-30m, which makes us a large LP in those funds – if you can deliver on co-investments, this increases dealflow, since GPs typically look at who the largest investors are in these funds and whether they might be able to go to them with co-investment deals."

People
YielCo – María Sanz (partner, co-head of private equity); Manuel Deimel (head of co-investments).

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• Fund-of-funds
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• Co-investments