Chicago Growth Grows But Retains Smaller Focus

In its second fundraising go-around as an independent buyout firm, Chicago Growth Partners has doubled its fund size while maintaining its lower-middle market focus. The firm, a spinout from investment bank William Blair & Co., topped its target by $100 million and this month closed its second fund, Chicago Growth Partners II LP, with $500 million in commitments.

Chicago Growth Partners wasn’t surprised by the enthusiasm from limited partners. The team had raised and deployed six funds as the core group behind William Blair Capital Partners, said David Chandler, a partner. When Chicago Growth went out to raise its first solo vehicle in 2004, the firm netted $270 million in commitments, earning backing from LPs such as Goldman Sachs, Skandia and its largest backer, Minnesota State Retirement System. Those three LPs increased their allocations when they re-upped for Fund II. Meanwhile, William Blair Capital Partners attempted to reorganize and raise a fund, an effort that fell apart in 2006 following management disagreements.

One reason the managers of Chicago Growth Partners left William Blair was to gain access to a more diversified LP base. The investment bank connection posed a potential conflict of interest that turned off investors, Chandler said. Investors assumed that all of a firm’s M&A mandates will go to in-house bankers, and because of that, competing investment banks won’t show the LBO firm its deal opportunities, depriving it of flow, he said. The formation of Chicago Growth Partners coincided with a number of LBO shop spin-outs in the investment banking world: Morgan Stanley let go of its buyout arm, since renamed Metalmark Capital; JPMorgan Chase spun out JPMorgan Partners, now called CCMP Capital; and Citigroup set free its buyout arm, now called Court Square Capital Partners.

After notching successful exits on investments from its debut institutional fund, Chicago Growth Partners has proven itself as a standalone entity, mollifying criticism about conflicts of interest and wooing reluctant first-time investors, Chandler said.

In June 2007, the firm generated a 4.2x return on its first realization from Fund I, the sale of a classroom technology company called eInstruction, acquired in 2005. Likewise, Chicago Growth Partners had success on a minority investment in Genoptix, a lab diagnosis service for hemotologists and oncologists, which went public in 2007. Chicago Growth Partners’s $8 million investment in Genoptix is now worth more than $33 million, according to Thomson Financial, publisher of Buyouts.

With the help of placement agents Cygnus Capital in Europe and E.L.K. Capital Advisors in the United States, Chicago Growth Partners started raising money in late September and held a first close on $350 million in December. Despite the increased fund size, Chandler said the firm isn’t looking up-market.

“In today’s market, $500 million is small,” he said. “We’re small potatoes, and we want it that way.”

The firm seeks deals in the $20 million to $300 million enterprise value range, writing equity checks of between $10 million to $40 million. A fifth of Chicago Growth Partners’s deals are minority growth investments; the rest are buyouts concentrated in the industrial sector as well as in business and consumer services.

With a final investment from Fund I in the pipeline, that pool is now fully committed. Chicago Growth Partners plans to put its new fund to work in the coming months, hoping to take advantage of depressed values. Although it’s possible to firm will seek to exit from two counter-cyclical portfolio companies, the shop is more likely to be a buyer than seller in 2008, Chandler said.—E.G.