Secondary specialist Banner Ridge Partners alleges in a lawsuit that private credit shop Brightwood Capital Advisors used it to “backstop” a private credit continuation fund in case an overwhelming number of LPs elected to cash out. The lawsuit alleges that when the opposite occurred, Brightwood cut Banner Ridge out of the deal and capitalized the CV itself.
In the summer of 2022, sell-side adviser Ely Place Partners approached Banner Ridge Partners co-founder Christopher Driessen with a proposal: New York-based Brightwood Capital Advisors wanted to launch a continuation vehicle containing private debt instruments still unsold from its $1 billion Brightwood Capital Fund III closed in 2014.
“Ely Place also told me that Brightwood was seeking to reset its management fee and incentive fee with the transaction,” Driessen says in an affidavit filed along with its April 4 lawsuit filed in New York Supreme Court.
According to the transaction agreement filed with the lawsuit, the fund expired at the end of 2023 after a one-year extension “and given the performance of Fund III’s portfolio to date, it would be unlikely that the general partner would have had the opportunity to earn any carried interest from Fund III.”
With the four-year term of the proposed CV, Brightwood told LPs it was “significantly more likely” to earn carried interest.
After negotiating for nearly a year, the two sides in June hammered out a base purchase price of $390 million, which included $253.54 million in LP interest, according to the lawsuit and the transaction agreement.
The two sides established “a base purchase price equal to 89 percent of the gross asset value of the portfolio as of June 30, 2022.” A final valuation was to occur at the close of the transaction in September when Banner Ridge was to pony up half its commitment.
The LPAC also agreed to the transaction. Banner Ridge even purchased a $14.5 million R&W insurance policy for $327,500.
The transaction agreement shows Brightwood would cut its management fee from 1.5 percent to one percent and switch its carried interest from a “modified American style” to a two-tiered European waterfall system. It would collect 10 percent carried interest after an eight percent hurdle and 20 percent carried interest after a 20 percent hurdle.
Brightwood also agreed to cancel rollover LPs’ unfunded capital commitments that exceed 20 percent of the purchase price.
Houlihan Lokey Capital provided a fairness opinion, the cost borne pro rata by the LPs, according to the transaction agreement.
But in August, Banner Ridge says it discovered that Brightwood had unilaterally valued the CV, and worse, allegedly capitalized the vehicle itself after only 36 percent of LPs elected to cash out. In September, Brightwood sent Banner Ridge a termination letter.
Now, Banner Ridge is seeking $58.1 million, which it says represents 36 percent of the CV’s projected profits. More importantly, Driessen says the firm wants back in the deal on its original terms.
“Money damages would be both inadequate and impracticable to fully compensate
Banner Ridge,” Dreissen concludes in a separate affidavit.
Neither Brightwood Capital nor its attorneys responded to requests for comment. Brightwood hasn’t yet filed a response in court. Lawyers for both sides are due in court on May 17.
Brightwood specializes in providing senior debt capital primarily to U.S. businesses with $5 million to $75 million of Ebitda in: technology and telecommunications, healthcare, business services, transportation and logistics and franchising.
The transaction agreement listed 21 assets that were to be included in the CV. One of those, Action Resources would be spun out immediately and sold to MRP Partners, owned and controlled by Banner Ridge co-founder Sengal Selassie. The transaction agreement says the Action Resources asset was valued at $118 million.
| Accurate Background | ADS Tactical | Astra-Logix Co-Invest II | Atlanta Restaurant Partners |
| Bedrock Holdings Group | Bristol Hospice | Diligent Corp. | Eagle Infrastructure Services |
| Flexis Broadband Holdings | FPT Operating | Hylan Intermediate Holdings II | Idaho Pacific Canada Holding |
| Impero Connecticut Holdings | Logix Holdings | LSF9 Atlantis Holdings | Management Health Systems |
| Premiere Global Services | TCC Wireless | Wireless Vision Holdings | Zips Car Wash |
Four assets were to be excluded: AAC New Holdco, Delphi Intermediate Healthco, Internap Corp. and U.S. Telepacific Corp.
Continuation funds have become increasingly popular vehicles to meet LPs’ rising demands for liquidity and to hang on to promising assets currently fetching unsatisfactory valuations. Houlihan Lokey reported $170 billion in GP-led transactions between 2021 and 2023 compared to $99 billion raised the previous four years.
A secondary market that includes CVs is also emerging for private credit.
A recent Ely Place survey reported that $15 billion of private credit portfolio sales are set to close this year. That’s triple the reported amount of deals closed in each of the previous two years.
When they first started gaining traction, skittish LPs presented with short time-frames and concerns over valuations and extended management fees generally cashed out.
Now, investors on both sides of these transactions say LPs are becoming more comfortable with the vehicles as GPs are deploying them more as a matter of routine than the exception. SEC-required third-party fairness opinions and GPs cutting or eliminating fees have also helped LPs decide to roll over their investments into the CVs.
“Higher interest rates and a lack of liquidity in the market paired with greater acceptance of secondaries as a portfolio management tool is driving exceptional opportunities for us,” Banner Ridge co-founder Anthony Cusano said when the firm announced it closed the $2.15 billion Banner Ridge Secondary Fund V.
Investcorp announced an investment in Banner Ridge in February.
The Brightwood CV was to be backed by the newest fund and Banner Ridge’s fourth fund, a $1 billion vehicle closed in 2021.
An unexpected number of LPs rolling over, 64 percent, appears to be the genesis of the legal dispute between Banner Ridge and Brightwood, according to the lawsuit. The lawsuit alleges Brightwood came up with the cash by selling assets intended for the CV Banner Ridge was supposed to capitalize.
“But the agreement was for Banner Ridge to invest, not to backstop Brightwood in case it needed help,” Banner Ridge alleges in the lawsuit.
Two days after filing the lawsuit, Banner Ridge’s Driessen says he received a text message from Ely Place founder Daniel Roddick saying Brightwood’s Selassie was open to continued negotiations.
Driessen replied that Banner Ridge was adamant about getting back into the deal on its original terms. That seems unlikely at the moment.
Roddick responded that Selassie “wants to avoid going back to the original bid.”
