Castle Harlan Determined To Stay Mid-Market

Castle Harlan Inc., a firm with a taste for restaurant deals, and no desire to be anywhere but the middle market, intends to return to market to raise a fifth fund this year. Expect the final tally to fall somewhere between $1.5 billion to $2 billion, according to a person close to the firm.

The firm closed its prior fund, Castle Harlan Partners IV, in 2003 at $1.2 billion, and as of November had invested about two-thirds of it. Exactly when the New York-based firm comes to market depends on the timing of when deals in the pipeline close. Limited partners in Castle Harlan’s previous funds include the state pension funds of Oregon, Michigan, North Carolina and Ohio. Other LPs have included the corporate pension funds of American Airlines, British Petroleum and Verizon.

Castle Harlan has made a name for itself buying restaurant chains like Luther’s Bar-B-Q, Charlie Brown’s, Morton’s, Perkins & Marie and Caribbean Restaurants. Beyond that it likes chemical makers, industrial companies and consumer products manufacturers, while tending to stay away from industries that are heavily regulated, such as financial services.

The firm bought five companies in 2006, and two the year before that. It prides itself on finding non-auctioned deals, and not paying more than 6.5x EBITDA in a market where lenders may offer more than that in debt financing alone. One recent deal, in November, was the buyout of steel castings maker AmeriCast Technologies, for $110 million. New York-based turnaround artist KPS Special Situations Funds was the seller.

Castle Harlan is one of several buyout shops formed and populated by ex-Donaldson Lufkin & Jenrette professionals. John Castle, DLJ’s former CEO, co-founded the firm in 1987 with Leonard Harlan, who was a vice president there. Castle Harlan Vice Chairman Gary Appel, who had co-founded DLJ Merchant Banking Partners and served on that group’s board and investment committee, matriculated to Castle Harlan later.

Castle Harlan also has one of the more prominent Australian investment arms in the world, Castle Harlan Australia Mezzanine Partners, better known as CHAMP. The group is the year-2000 combination of Castle Harlan and Australia Mezzanine Investments and it has $1.5 billion under management through two funds. The “mezzanine,” as it appears in Sydney-based CHAMP’s name, refers to preferred equity, not a debt strategy. Recent deals include the purchase of a group of malting companies which created United Malt Holdings, which has operations in the United States, the United Kingdom and Australia.

Castle Harlan and CHAMP together have 35 investment pros.—M.C.