AEA Holds Close On Inaugural Small Biz Fund –

While the rest of private equity is busy either buying or selling, AEA Investors has turned its focus inward. The firm jumped into the PE/hedge fund convergence trend by merging with Aetos Capital, and recently AEA launched two new funds, a $400 million mezzanine vehicle and a $400 million small-market buyout fund. The small-market vehicle, AEA Investors Small Business Fund, LP, recently held a close at $114.6 million, according to SEC filings.

AEA launched the small business fund last year, and the firm’s Website noted that its investment approach and sector focus would mirror that of AEA’s larger, primary buyout fund. The larger fund, the firm says, invests in business services, consumer products, specialty chemicals and value-added industrial sectors, and representative transactions include acquisitions of Burt’s Bees, Convenience Food Systems and Kranson Industries.

The firm did not indicate its standard deal size, but based on the auctions in which AEA participates, the firm would qualify as a middle market shop. AEA regularly participates in auctions in the $150 million to $600 million enterprise value range and has gone as high as $1.5 billion, albeit as part of a consortium. The small market fund could probably be expected to fill in for deals that come in under that range.

The firm has had a relatively spotty record recently. AEA registered a win for the firm and its co-investors through the sale of Noveon International, which yielded a 2.4x return for the consortium. However, the firm’s investment in Rand McNally hit the skids when the mapmaker entered bankruptcy protection in 2003. (Control was ultimately handed over to Leonard Green & Partners and other new investors.) Meanwhile, AEA’s investment in Sutton Place and Balducci’s took a wrong turn when the firm plunged $23 million to grow the grocer’s online business. After that failed, AEA unloaded the company to Bear Stearns Merchant Banking, which acquired the company for $50 million at the end of 2003.

AEA counts itself among the old guard in the private equity business. The firm has been around since 1968 and was originally set up to manage the PE interests of some of the most prominent industrial families in the U.S. and Europe, including the Rockefellers, Mellons and Harrimans. Even back then, the focus was the mid-market, and the firm has stayed to true to that mandate even as many of its former peers have extended themselves into the large and mega markets.

But rather than move up in the food chain, AEA’s new fund could be a way for the firm to keep to its middle market mandate while at the same time capitalize on its name in the less competitive small market. The oft-mentioned and recently challenged barbell strategy is based on the pinch LBO investors are feeling in the middle market, and identifies the large and small markets as the most attractive areas in which to put money. Meanwhile, for investors that expect more than just the financial engineering plays that may work in the large market, the small market can allow for the most upside from instituting positive change.

Catharine Burkett, of fund-of-funds Camden Partners, expressed this sentiment this past March, when she told Buyouts, “The larger guys can do a lot of cost reductions, certainly, but they can’t achieve the kind of growth and change that a smaller deal can do.”

The AEA filing did not mention if a placement agent was involved in the fundraising, but it did indicate that the $114.5 million came from just five accredited investors.