Former SKM Affiliate Completes Debut Fund

Parallel Investment Partners, the private equity partnership formerly known as SKM Growth Investors, has completed raising its first independent private equity fund, closing on $231 million in limited partner commitments. Parallel spun out from its joint partnership with Saunders Karp & Megrue when the latter merged with Apax Partners in April 2005.

Dallas, Texas-based Parallel set out in August 2005 to raise the $200 million targeted Parallel 2005 Equity Fund LP and ended up closing the investment vehicle north of its $225 million hard cap in about eight months.

Parallel’s roots go back to 1999 when the team partnered up with Saunders Karp & Megrue to make lower middle-market investments with a dedicated $150 million pool of capital carved out of the latter’s $735 million SKM Equity Partners III LP. As of the end of 2005, the Parallel team had invested more than 80% of the allotted capital in 14 companies, nine of which are still active investments. Parallel and Apax will continue to manage those former investments together.

“Because we had a lot of support from the LPs we shared with SKM, we were able to raise the fund without a placement agent,” Parallel Managing Director Barron Fletcher said, noting that about 75% of the new fund’s commitments came from investors in SKM’s Fund III. In all, Parallel 2005 has about 15 limited partners comprising a “healthy mix” of corporate pension funds, institutions, foundations and funds of funds.

Fletcher also believes the smaller size of the new fund was a factor in Parallel’s ability to raise it solo. “It may not look like it, but there is a huge difference between raising a $200 million fund and a $400 million fund,” Fletcher said. “With a $400 million fund you’re probably going to need to increase the number of investors you talk to by four to five times what you would for a fund half that size. That’s why it’s common to see those guys work with placement agents.”

Parallel participates in traditional buyouts, control stake recapitalizations and minority-stake growth capital investments in North American businesses with revenues of at least $10 million and EBITDA of at least $3 million. Fletcher said about two thirds of the new fund’s capital will be directed toward control-stake transactions (primarily recaps), while the remainder will go toward growth capital tranches.

About half of Parallel’s time is spent looking at companies in consumer-related markets. “It’s the biggest single category of businesses in the U.S. Consumer spending represents about two thirds of the U.S. GDP,” Fletcher said. The firm’s next industry destination is business services companies, which receive about a quarter of the firm’s attention, while the remainder of its time is spent looking at opportunities in the education, energy, healthcare and specialty manufacturing arenas.

Equity from Parallel 2005 has already been used to consummate the recapitalizations of three businesses, including specialty retailer Weisman Discount Home Centers, restaurant operator Marmalade Café, and sports media programmer Winnercomm. In all the firm expects to make about 15 investments with equity from Parallel 2005 at a pace of about two to three deals per year.

“So far we’re a little ahead of the curve because we had a lot of opportunities on the table,” Fletcher said.—A.N.