A reader asks: "what is is an annex fund?"
Annex funds (also known as top-up funds) are making a reappearance thanks to the global financial crisis. PE firms are being forced to hold portfolio companies for longer than planned and to support them with extra capital. This money might be needed to meet an equity cure or just to provide working capital for tough times. Unfortunately some PE funds are starting to run out of cash. I recently wrote about Bain Capital's response to this problem.
An annex fund is a bit like a rights issue. It's usually offered pro rata to the PE fund's current LPs, but is established as a standalone legal entity. Like a normal PE fund the limited partners commit a certain amount of capital to the annex and the money is then called down as required. Sometimes annex funds are allowed to invest in new businesses, but more typically their mission is to protect and maximise the value of an existing portfolio.
Annex fund politics can get ugly. Those LPs who are unable or unwilling to commit their pro rata capital get very sensitive about the valuations at which the annex fund injects new money into the existing portfolio. And the LPs who did participate feel they should be generously rewarded for making valuable capital available and protecting the past investments.
I think it's fair to say that annex funds are more common in the venture capital world than in private equity land.
