Fenway Leaves Transportation Behind; Loses Several Executives

Fenway Partners, once considered a premier mid-market buyout firm, is undergoing a dramatic personnel and strategic shift as its executives work through a challenged portfolio and try to put themselves in a position to raise a new fund.

Though its founders remain in place, several executives have left the firm in recent years. Meanwhile, the firm has stopped investing in transportation, a sector that has produced several underperforming investments.

The challenges facing Fenway Partners highlight those confronting many mid-market shops that invested heavily in the peak days of the buyout boom from 2005 through 2007. Many firms have found they over-paid for companies that then struggled in the recession; this dampened fund performance and jeopardized their ability to raise new funds.

Fenway raised $702 million for its third fund in 2007, then headed out to invest $50 million to $75 million in buyouts of companies in consumer branded products, transportation, logistics and specialty distribution. Its last new investment happened in August 2010, when it bought SunTek, a manufacturer of solar control window films used in the automobile, architecture and safety and security markets.

The fund has generated an investment multiple of 0.80x and an internal rate of return of -7.30 percent as of June 30 for the Oregon Public Employees’ Retirement Fund, which considers it a 2006 vintage fund. The firm has 10 portfolio companies, four of which are in the transportation sector. All four were bought between 2005 and 2007. Some of those companies have struggled, Richard Dresdale, a co-founder of the firm, told Buyouts, leading Fenway to abandon the sector.

Aron Schwartz, a managing director who joined the firm in 1999, is transitioning out of the firm. Meanwhile, he is pursuing investment opportunities on his own and entertaining offers from other firms. Marc Kramer, a managing director who helped lead the firm’s investments in the transportation sector, left the firm over the summer because it wasn’t making many new investments and wouldn’t likely raise another fund, if at all, for another 18 months or so; he has since joined H.I.G. Capital.

The departures of Schwartz and Kramer follow the departures in 2007 and 2008 of Mark Genender, a managing director based in Los Angeles who left the firm when Fenway decided it no longer wanted to run a West Coast office; and Mac LaFollette, a managing director who left to pursue entrepreneurial opportunities. In 2010, Genender joined The Carlyle Group as a managing director in its consumer and retail group.

A core group of executives remains committed to Fenway, including Peter Lamm, a former general partner with Butler Capital Corp., and Dresdale, a former principal with Clayton Dubilier & Rice, who co-founded the firm in 1994. Managing Directors Timothy Mayhew, who leads the firm’s investments in the consumer sector, and Gregg Smart, have been with the firm since 2003 and 1999, respectively. The firm has a total of 12 investment professionals.

Dresdale said the departures of Kramer and Schwartz were amicable and driven in part because Fenway had too many general partners for a mid-market fund. Further, he said, it made sense for Kramer to leave since Fenway will no longer invest in the transportation sector. Schwartz’s interests similarly run counter to Fenway’s focus on consumer and specialty distribution sectors in North America: he is interested in executing a wide variety of investments in a broader geographical basis.

“For a $700 million fund at the tail end of its investment period, we’re well sized,” Dresdale said.

Fenway hopes to sponsor two liquidity events in 2012, which should help improve Fund III’s performance, Dresdale said. He and his colleagues remain hopeful Fenway will raise a fourth fund, possibly in 2013. But for now the firm is focused on managing its 10 portfolio companies.

“What’s incumbent on us over the next 24 months is to return capital to our limited partners,” Dresdale said.