Babson banks on a billion

It helps to not be a first-time fund. That was the lesson learned by MassMutual Financial Group’s Babson Capital, which recently closed on $1 billion for its second mezzanine fund, Tower Square Capital Partners II, in relatively short order.

Babson was anticipating a six- or nine- month process for Tower Square II, but the fund-raising process went quicker – only four months.

“Once we proved we could operate under the M.O. of a fund, people were very, very enthusiastic about what we had to sell,” said Babson Managing Director Mike Hermsen. “The doors opened much more quickly in 05 than they did in 02.”

MassMutual invested $600 million and the other $400 million came from outside LPs. The size of the fund is a step up from Fund I, which had $265 million in commitments.

Part of the story that LPs heard in Babson’s road show was that even if there is only a roman numeral II, this is by no means a young team. Hermsen, along with Mike Klofas and Rick Spencer have been working together in mezz and private equity for more than 15 years at Babson and MassMutual. MassMutual, for its part, has been investing in mezz since the 1950s.

But Tower Square I was their first third-party investment vehicle, and for that reason it was hard to make some LPs bite. “Many weren’t prepared to invest in a first-time third-party fund,” said Hermsen.

For Fund II, though, not only did old LPs re-up, new ones jumped on board as well. Within the $400 million that came from new LPs, about $125 million came from existing Tower Square I investors and $275 million came from new investors. The names of the LPs are undisclosed.

About 85% of Tower Square II will invest in mezzanine deals and 15% in equity co-investments. The mezz deals will range between $10 million and $40 million, while the equity co-investments will be for between $5 million and $15 million.

Tower Square II’s sweet spot is transactions with enterprise value of about $150 million.

Tower Square II has already invested a good chunk of its capital from fund II.

In fund I, Babson invested in 57 portfolio companies and there have been eight realizations, which have returned in excess of 40 percent. Babson is quick with the caveat that this is not representative of the returns the entire fund might have, but they have been pleased.