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A Founder Leaves Key Principal Partners For Seacoast

A co-founder of Key Principal Partners, a mezzanine fund manager that is part of the Cleveland banking company KeyCorp, is leaving after 13 years to join another mezz shop, Seacoast Capital Partners LP, Buyouts has confirmed.

Dealmakers on both sides of the move describe Timothy Fay‘s transition as an amicable one, giving Fay, who now is KPP’s West Cost managing partner in San Francisco, a chance to return to making the kind of deals—and especially the size of deals—he prefers.

At the same time, though, the move also underscores the uncertainties facing private equity shops that are affiliated with banks. Under last year’s Dodd-Frank financial reform law, bank holding companies will be limited in the future to investing 3 percent of their core, Tier 1 capital, in private equity or hedge funds, and they can contribute no more than 3 percent of the commitments to such funds.

Fay is expected to move to Seacoast in the summer.

“He’s returning to his roots,” said Thomas W. Gorman, a managing director at Seacoast, which is based in Danvers, Mass., and where three of its four current partners work now, with the fourth in San Francisco. “Tim will significantly bolster our presence out there.”

KPP and Seacoast have a common strategy—non-control investments in support of management teams at small, growing companies, typically with no other sponsor backing. But where Seacoast typically cuts checks of $3 million to $10 million, KPP today makes investments more in the $20 million to $25 million range.

“Tim always liked the smaller company market,” said John Sinnenberg, KPP’s chairman. Before co-founding KPP in 1998 as Key Mezzanine, the two men had worked together at PMI Mezzanine Fund LP, and before that at Barclays Group—almost 20 years in total. As both men are now in their 50s, and with both KPP and Seacoast coming toward the end of their current funds, Sinnenberg said, “I told him, ‘Tim you ought to do what you’re passionate about.’ “

Fay said Seacoast is the kind of firm that KPP used to be before it moved up to larger deals. “The concentration of large deal business is much more East Coast driven,” Fay said. “This is what I like to do. If you make enough money, you should be able to focus on what you really like.”

Seacoast, a small business investment company, is investing out of its $75 million, 2003-vintage Seacoast Capital Partners II LP fund, giving the firm access to $225 million of capital under SBIC rules. KPP closed its KPP Investors III at $435 million in 2006.

Neither firm would discuss future fundraising, but Sinnenberg said KPP historically received half its funding from KeyCorp and half from outside investors, including pension funds, funds of funds, wealthy families and others. He said he could not discuss the mezz fund’s outlook under Dodd-Frank.

But KeyCorp, battered by the financial crisis, has been willing to exit non-core businesses to shore up its core banking franchise. In January, its investment banking arm, Key Capital Corp., spun off its private equity fund-of-funds KCC Management, which was renamed Cuyahoga Capital Partners. KeyBank, its retail banking division, also has exited business lines including student lending and marine finance.

KPP has a proven team with a demonstrated track record and talented young managers ready to step up, Fay said. “Everyone will continue to do very well.”