The firm, which traces its roots to a family office founded in 1947 to manage money for an heir to the Sears Roebuck & Co. fortune, has been investing third-party money in private equity since its founding by Charles D. Klein and Michael G. Fisch in 1994. Last year the firm, which has about 25 investment professionals, closed its sixth mid-market buyout fund at $3.64 billion.
American Securities moved into distressed debt and turnaround investing around 2006. That year it launched affiliate American Securities Opportunities Management, which went on to raise and invest a $300 million 2007 vintage pool and a $725 million 2010 vintage pool, according to Thomson One, a product of Buyouts publisher Thomson Reuters. Another mid-market buyout shop, Aurora Capital Group, launched a distressed debt and turnaround operation about the same time; its 2007 vintage Aurora Resurgence Fund LP, a $636 million pool, is one of the top-performing funds of that vintage in the Buyouts returns database.
American Securities Opportunities Management has been in the market seeking to raise $750 million for American Securities Opportunities Fund III LP, a fund that features a $1 billion hard cap, according to an analysis of the opportunity by advisory shop Hamilton Lane for client Teachers’ Retirement System of Louisiana. Executives at American Securities declined to comment for this story.
The roughly 10-member investment team, led by Managing Directors Anthony Grillo and Lawrence First and based in New York, target investments of $20 million to $100 million, mainly in the secured debt of companies generating anywhere from $100 million to $1.5 billion in revenues. The firm makes three primary types of investments, according to the Hamilton Lane write-up dated April 1. It invests in debt available at substantial discounts to par; it invests in debt whose issuer is in default; and it makes loans to troubled companies, including debtor-in-possession loans. Often the strategy involves buying substantial portions of the so-called fulcrum debt—the highest-ranking debt that would realize losses in a sale or liquidation—to gain a blocking or control position in any restructuring.
American Securities Opportunities Management plans to make roughly 30 to 40 investments with Fund III. It sees particularly fertile territory in health care services, defense contracting, waste services and building materials, all of which are being pressured by cut-backs in government spending at federal, state or local levels.
Hamilton Lane, which in its write-up said it planned to commit up to $75 million to the fund for Louisiana Teachers’ (not to exceed 10 percent of the fund), called the realized returns on the first two funds “attractive” and noted they were done “without the use of fund level leverage.” The advisory shop put the net IRR of Fund I at 31.9 percent, with a total value to paid-in capital multiple of 1.4x as of Sept. 30; and the net IRR of Fund II at 12.9 percent with a total value to paid-in capital multiple of 1.1x. It called both results top-quartile. Altogether the two funds had made 98 investments and realized 64, or about two thirds, as of Sept. 30. About $1.3 billion had been drawn down from Funds I and II as of Sept. 30, $933 million returned, and the remaining assets are valued at $601 million, according to the write-up.
Distressed debt and turnaround investing aren’t for everyone—and especially not for those unable to make the necessary investment. According to Hamilton Lane, Grillo and First “have on average nearly 30 years of distressed credit investment experience,” while the five managing directors on the team “average more than 21 years of credit experience.” Since 2006 the firm has doubled the size of its Opportunities Fund investment team, allowing senior investment professionals to specialize by industry.
None of this comes cheaply. But if the fund gets to its $1 billion hard cap, I’m sure the firm will consider the effort well worth it.
Buyouts Senior Editor Gregory Roth contributed to this column.