Blue Wolf Aims To Triple Fund Size

Firm: Blue Wolf Capital Partners

Fund: Blue Wolf Capital Fund III LP

Target: $300 million – $400 million

Placement Agent: None

Executives at Blue Wolf Capital Partners are eyeing a much larger fund for their sophomore effort.

The small turnaround shop had hoped to raise as much as $250 million for its debut institutional fund in the fall of 2008, but settled on $118 million—a respectable size considering it raised the fund in the fall of 2008, as the economy was imploding.

Three years later, with two solid exits in its pocket, the firm expects to raise $300 million to $400 million for its second fund, Adam Blumenthal, the firm’s founder, told Buyouts.

Blue Wolf expects to begin the process sometime next year, and has not yet hired a placement agent.

The firm specializes in distressed turnarounds, with a particular specialty in taking on troubled companies that involve unions and the government. It invests a minimum of $10 million in transactions of at least $20 million and typically less than $50 million.

Blumenthal said the firm would be comfortable doing slightly bigger deals. Blue Wolf raised its first fund on the strength of three deals is it did as a fundless sponsor that were in the $100 million enterprise-value range. “It’s kind of ironic, but we were doing bigger deals before we had the fund,” Blumenthal said.

Blumenthal founded the firm in 2005. Prior to that, he was first deputy comptroller and CFO for the New York City Comptroller William C. Thompson Jr. From 1989 to 2002, he was an executive at American Capital Ltd. Blue Wolf has eight investment professionals, including Charles Miller, a partner and attorney who was formerly with Patton Boggs LLP, the prominent Washington, D.C., law firm, and Michael Ranson, a partner who was formerly a portfolio manager at GoldenTree Asset Management LP and, before that, a vice president at American Capital.

Altogether, the firm has made seven investments, two of which it has exited. The firm generated about 3.9x its investment and a 95 percent internal rate of return on Healthcare Laundry Systems, a company that provides laundry services to hospitals and clinics in the Chicago area that Blue Wolf bought in 2008 and sold in March of this year, Blumenthal said.

The firm’s other exit was Northern Resources, a severely distressed manufacturer of pulp used in a variety of paper products based in Nova Scotia that Blue Wolf bought—with no equity—in 2008 from Neenah Paper Inc.

As part of this complicated deal, the firm brought in John Hamm, the former premier of Nova Scotia, as board chairman; created a local economic development partnership with local citizens; helped capitalize some of the company’s contractors; and negotiated with the provincial government to help finance the company’s acquisition of 475,000 acres of land—about the size of Rhode Island—with timber critical for the pulp mill and the local economy. The firm sold the company to Paper Excellence Canada Holdings Corp.—which had passed on the mill when Blue Wolf bought it—in May for an undisclosed amount. Blumenthal described the return as “extremely meaningful” and “significantly better” than the return generated by the Healthcare Laundry Systems investment.

The firm still has almost half of its first institutional fund, which it expects to devote to two to three portfolio investments before the end of the year and early next year.