Behrman Capital Tops off Fund III –

Going against the grain in a tough fund raising-market, Behrman Capital III LP, the most recent fund from New York- and San Francisco-based Behrman Capital, this month closed oversubscribed with $1.2 billion.

Merrill Lynch, which placed Behrman’s debut fund, was also retained for its third fund.

The firm launched Fund III early last year with the goals of raising $1 billion and diversifying its limited partner base with some international additions, said Darryl Behrman, a founder and managing partner at the firm. The result was just that.

Despite interest from existing and new limited partners, Behrman described the fund raising as “painful.”

“It was a very long process,” he said. “Particularly the last half of the last year was an extremely difficult environment.”

With that said, Behrman Capital III attracted all but three previous investors and a significant group of new LPs. Of the three investors that chose not to re-up with the fund, one is out of the market, and the two others felt that this fund came too early, said Behrman. The return investors, which committed $518 million combined into Fund II, raised the stakes this time around, committing $675 million to the new fund.

Institutional investors represent 98% of the committed capital, which breaks down into 36% public pension funds, 21% financial institutions, 10% fund-of-funds and 9% corporate pension funds. Fund III also received approximately 22% of its capital from foreign institutional investors, located mainly in Europe, but also in Asia.

California Public Employees’ Retirement System contributed $150 million to the fund. New York State Common Retirement Fund committed $100 million. Kansas Public Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Illinois State Board of Investment and Ohio Bureau of Workers’ Compensation also added commitments to the fund. The total number of LPs in the fund is just under 50.

Behrman’s latest fund will follow the lead of its predecessors, focusing on companies in the information technology, outsourcing, business services and contract manufacturing sectors. “We have decreased our focus on health care . . . over the last 18 months,” said Behrman. “We did not have a great deal of success [in that sector] and recognized that we needed to focus our resources where we were extremely successful.”

Most of the fund’s investments will be in U.S.-based companies, although the fund can invest up to 15% in Western Europe. The average equity investment will be between $25 million and $100 million.

The Winners from the Losers

Buyout firms, in general, this year seem to be coming out of fund raising bruised, battered and a little baffled about what makes some funds take off and others flounder. Behrman said that he can’t speak for other funds, but he has an idea of what made Behrman Capital III an appealing vehicle.

He said it was likely the combination of returns, strategy and people at the firm. Although it’s too early for return information for Fund II, at the time Fund III went to market Behrman Capital’s investments had generated 60% to 70% gross IRR. However, Behrman notes that those figures pre-date much of the recent market turbulence.

Next, Behrman said that the firm’s strategy of sticking to its knitting may have also spoken well for the fund. “We didn’t wander off the reservation at all,” he said. “We did exactly what we said we were going to do. There isn’t a single dotcom in our portfolio . . . we didn’t get caught in the hype of the Internet frenzy.”

And the last element that Behrman mentioned is the minimal turnover in the team at Behrman Capital, which has lost only two people in 10 years.

“I would imagine that it is not a single factor, but probably a combination of the above,” he said, adding, “but it wasn’t easy for us.”