Cahill, Warnock Readies First Close

Just two months after launching its second private equity vehicle, Baltimore-based investment firm Cahill, Warnock & Co. LLC is aiming to hold a $100 million first close within the next few weeks. The new fund, which is named Cahill, Warnock Strategic Partners Fund II LP, will back public companies while also engaging in late-stage venture capital. A final close is expected in November, with approximately $250 million in total capitalization.

Cahill II will focus on the service sector industry and will make investments in U.S.-based business services, communications, health-care and education companies.

Approximately 75% of the fund will be used to occupy a space in the private equity marketplace that does not currently pay much attention to micro-cap public companies that have a value of $250 million or less.

“A lot of these micro-cap stocks have limited analyst coverage, not a whole lot of liquidity and consequently limited access to institutional investors,” said Robert Johnston, managing director with Cahill. “But many [of these companies] are growing and need capital for expansion.”

Johnston expects the fund to do as many as 25 deals, ranging from $5 million to $20 million in size, with typical investment size averaging about $10 million. He said the fund should have a four-year investment cycle.

Johnston was quick to point out that Cahill’s PIPE transactions will take the form of convertible securities

“We are not going to be taking common stock and just passively sitting there with it,” he said. “We take senior, secured positions and work with these companies.” he said.

Johnson added that, at a certain point, Cahill, Warnock will convert its preferred holdings into common stock to sell for a profit, or, possibly, distribute some of the common stock to its limited partners so they can sell it on their own.

Limited partners in Cahill, Warnock Strategic Partners Fund I LP, which closed on $125 million in 1996, included Computer Outsourcing Services Inc., InKine Pharmaceutical Company Inc., MedPlus Inc., Telescape International Inc. and Touchstone Applied Science Associates. They were joined by an assortment of high-net-worth individuals.

Johnston declined to identify any of the potential LP’s for the new vehicle but did say that one of the firm’s 20 largest, existing institutional LP’s was considering not participating in the new fund.

Johnston said the firm would put up more than 1% of the fund’s total capital. The vehicle retains the industry standard 2% management fee and 80%/20% carried interest split. Fund I is now 90% invested in 18 deals. Johnston said it would do another one or two deals and be fully committed by the end of the summer. He declined to provide a rate of return for Fund I.