CapitalSouth Reaches Home Stretch On Fund III

Firm: CapitalSouth Partners
Fund: CapitalSouth Partners III LP
Target: $300 million
Amount Raised: $285 million
Legal Adviser: Robinson, Bradshaw & Hinson, PA

CapitalSouth Partners, a specialist in buyouts and mezzanine financings of lower middle-market companies, is expected to close its third fund this May at as much as $330 million, a source close to the firm told Buyouts. The firm launched CapitalSouth Partners III LP last year, raising $285 million on its way to a $300 million target.

As its name suggests, Charlotte, N.C.-based CapitalSouth seeks opportunities mainly in the southern United States, but it does consider investments anywhere in the country. The firm operates across a broad swath of industries, including building products, business services, consumer goods, health care, retail and technology. The firm shies away from start-up companies, turnaround opportunities and businesses outside the United States.

The firm plans to invest in as many as 60 small companies during the next five years, deploying $3 million to $15 million in most deals, but occasionally as much as $25 million. Targets typically generate annual earnings of between $2 million and $10 million. Portfolio companies include Impact Confections Inc., a Colorado Springs, Colo.-based candy maker; and Spartan Foods Inc, a Spartanburg, S.C.-based food manufacturer.

Roughly a third of the limited partners in the new fund are small banks, which are kicking in about $100 million. The other $200 million comes in the form of loans from the U.S. Small Business Administration and another large lender, President and CEO Joseph Alala III told The Charlotte Observer. Since CapitalSouth’s inception, it has been linked to Small Business Association lending programs, aimed at stimulating small businesses by supplementing the flow of private equity capital they receive.

Last year, in addition to launching the fund, CapitalSouth expanded the firm’s geographic footprint. In late 2007, Kenneth Berryman joined as a director and opened an office in Louisville, Ky., while Director Jay Turner signed on earlier this year to open an outpost in Dallas and source deals in the southwest. The firm has a total of seven investment professionals.

Founded 10 years ago, CapitalSouth has roughly $500 million in capital under management. The firm also has offices in Raleigh, N.C., and Tampa, Fla.—J.P.