Blue Wolf Hunts Down First LP

Firm: Blue Wolf Capital Management

Target: $100 million – $160 million

Amount raised: $33.5 million – $43.5 million

Limited partner: Johnnic Holdings (JSE: JNC)

Since leaving the City of New York’s Office of the Comptroller early last year to put together a new private equity firm, Adam Blumenthal and Josh Wolf-Powers have worked to secure deal flow and establish a base of capital to start doing deals. Their firm, Blue Wolf Capital Management, announced earlier this month that it has secured its first limited partner and will begin making investments soon before starting a larger effort to raise its first fund.

South African investment firm Johnnic Holdings (JSE: JNC), an affiliate of Hosken Consolidated Investments (HCI) (JSE: HCI), has committed between $33.5 million and $43.5 million to the firm. Blue Wolf has asked Johnnic and HCI CEO John Copelyn and Chairman Marcel Golding to serve on its investment committee. Blumenthal has known Copelyn and Golding since the early 1990’s. “We’ve built similar businesses in different markets and we’ve long wanted to work together,” says Blumenthal.

The firm will use the funding from Johnnic to do deals before heading out to fund raise to the larger LP community. People familiar with the firm’s fundraising efforts say Blue Wolf’s new fund is expected to raised between$100 million and $160 million. According to documents filed with the Johannesburg Stock Exchange, Johnnic has acquired a 51% interest in Blue Wolf and is committed to $40 million or 25% of the inaugural fund’s total value, whichever is greater. Johnnic’s commitment is also contingent on Blue Wolf raising a fund of at least $100 million.

New York-based Blue Wolf will invest in companies that have federal, state or local governments as customers or that are involved with government or government agencies in a substantial way, that have employees represented by labor unions and distressed companies in need of restructuring. The firm will target transactions between $10 million and $150 million. The middle market is a crowded field, but Blue Wolf is banking on their focus putting them in a market segment that will weed out a lot of potential competitors. Still, the firm says it understands that run-of-the-mill middle market firms brimming with cash are a threat.

“There’s a phrase which limited partners use which is JAMBO: Just Another Middle Market Buyout firm,” says Blumenthal. “We’re not a JAMBO. We have a unique set of experiences that no other team can lay claim to. If you’re a JAMBO, all you can do is compete on price; that’s why their returns aren’t good and LPs try to stay away from them, but competition from people who can always comp on price is always a risk.”

The firm has been looking for deals for over a year now and Wolf-Powers says that the deal flow is very strong. While he declined to say how soon the current capital might be invested, he said the money would be invested over a relatively short period of time. Blumenthal says that having some working capital to do transactions before beginning formal fund raising makes sense and has been used by other successful buyout firms, such as Apollo Management.

Blumenthal and Wolf-Powers are making the jump from the LP side to the GP side of the private equity world, where they have most of their experience. Before working for New York City, Blumenthal led American Capital Strategies (Nasdaq: ACAS) and Wolf-Powers specialized in special situations and turnarounds with KPS Special Situations Funds. They say that having spent a few years working for a limited partner was an invaluable education. “Having had the experience of spending several years in a government entity that was investing in private equity gave us a perspective that is valuable and that few GPs have as to the nature of decision marking and the nature of risk,” says Blumenthal. “While life managing public pension assets is quite different than life as a GP, the education that you get from sitting on the LP side for a while is valuable and not attainable for any other way.” — M.S.