Forty Institutions Back Lightyear’s New $850M Fund

Firm: Lightyear Capital LLC

Fund: Lightyear Fund II LP

Target: $800 million

Amount Raised: $850 million

Fund Terms: Management Fee: 1.75 percent; Carried Interest: 20 percent

Placement Agent: Merrill Lynch

Legal Counsel: Simpson Thatcher & Bartlett

It took well over a year, but financial services specialist Lightyear Capital LLC has closed its second buyout fund at $850 million. Lightyear Fund II LP weighs in at $100 million more than its predecessor, thanks to attracting 10 times the number of institutional limited partners.

“In a way, our second fund is kind of like a first fund,” Lightyear Chairman, CEO and Founder Donald Marron told Buyouts. He said the process of raising it involved going out and “meeting a lot of new people.”

Indeed, Fund II has about 40 institutional investors, up from four in the debut fund, according to a source close to the firm. Among the new investors is the Canada Pension Plan, which last year committed $100 million to Lightyear Fund II, according to its Web site. The New Mexico State Investment Council unanimously approved a commitment of $60 million to the fund in February 2006, while in June the San Francisco Employees’ Retirement System approved a $20 million investment.

About 60 percent of the investors are based in the United States, while the remaining 40 percent hail from Canada and Europe, the source noted. Terms of Lightyear Fund II include management fees of 1.75 percent and a 20 percent carried interest, Marron said.

Lightyear officially filed to start raising Fund II two years ago, “but most of the fundraising efforts took place in the last 15 months,” Marron said. “We actually kept the fund open a little longer because we had two other investors that needed a little more time to go through their processes.” Marron declined to name new LPs.

Fund II has a five-year investment period, which began in September 2005. To date, Lightyear has made two investments through the new fund, deploying about 20 percent of its dry powder in the process. In early 2006, Lightyear teamed up with Lehman Brothers Merchant Banking to form Flagstone Reinsurance Holdings Ltd., and the pair capitalized the company with $715 million. Later that year, Lightyear invested in Delos Insurance Group (f.k.a. Sirius America Insurance Co.) along with a consortium that included AlpInvest Partners and Lehman Brothers Merchant Banking.

Lightyear is targeting 10 to 12 transactions with Fund II, and plans to cut equity checks of between $50 and $150 million per deal, Marron said. The firm is a dedicated, mid-market financial services acquirer that takes control positions in asset managers, brokerages, insurance providers, and leasing companies. At times the firm participates in larger deals with co-investment partners.

“Financial services is the biggest segment of the S&P by far—about 22 percent—but it’s only six or seven percent of private equity, so we see a lot of opportunity there,” Marron said. He added that the financial services market is a “constantly consolidating and deconsolidating industry, so there are always new and interesting areas that are developing.” Marron also noted that the financial services industry is growing at about 1.5 times the rate of GDP.

That said, the financial services market has been heating up among buyout firms. Last year, investments in the sector represented about 6 percent of the 1,007 deals tracked by Buyouts—putting the financial services industry in the same boat with manufacturing and industrial deals in terms of number of transactions completed.

Industry generalists such as Circle Peak Capital, The Carlyle Group and TA Associates were all active in the market last year, as were dedicated specialists like Lovell Minnick Partners and Stone Point Capital. Earlier this year former Virginia Treasurer Bill Wiley and colleague Greg Schnitzler launched a new firm called Ascential Equity, which is focused on investing in small banks. Ascential is targeting $200 million for its first fund.

Marron, the former chairman and CEO of Paine Webber Group Inc., left that company shortly after overseeing its November 2000 sale to UBS.

By May 2002, Lightyear closed its $750 million inaugural vehicle, The Lightyear Fund, with the help of only four institutional investors. UBS reportedly chipped in $500 million to the cause. The other three were Caisse de Dépot et Placement du Québec, General Electric and Yasuda Mutual Life Insurance Co., according to our source close to the firm. All but Yasuda, which has subsequently merged with Meiji Mutual Life Insurance Company, are investors in the latest vehicle.

So far Lightyear has realized eight of its 17 investments from the original fund. Combined, those realizations average out to a gross IRR north of 50 percent, one source said. The entire fund—including non-realized investments—has achieved a current gross IRR of north of 35 percent, said the source.

For its second fund, Lightyear tapped Merrill Lynch to serve as placement agent and relied on Simpson Thatcher & Bartlett for legal counsel.—A.N.