By promising new and old limited partners that its latest fund would continue to make middle-market investments and be as successful as its previous funds, Fremont Partners closed its third fund, Fremont Partners III, $70 million above its $850 million target. The San Francisco-based firm managed to raise $920 million, a significant increase over Fremont Partners II, a $605 million fund raised in 1996.
“Over the years we have been very disciplined in sticking to our strategy. We did not deviate from it when everyone was doing high-tech and telecom deals, we just continued to make control investments in sound companies. It’s refreshing to LPs,” said Mark Williamson, a managing director of Fremont, who added that Fremont’s stable, long-term management team was also an asset when raising this fund.
In addition to a strong team and unwavering commitment to its strategy, Fremont had success raising this fund, Williamson said, because the middle-market area is in dire need of attention. “Investors are interested in the middle market because companies in the area have limited options in terms of capital. The public markets are not there and neither is the debt market. Middle-market companies seem to need money,” Williamson said.
Approximately 30% of the capital for Fremont Partners III, which was launched at the end of 2000 and held its final close at the end of 2001, came from new investors, while the rest is from previous investors. New investors include Bill & Melinda Gates Foundation, MR Investments, Boeing and Delta Air Lines. Previous investors re-upping for Fund III are Fremont Group, General Motors Asset Management, MetLife, Vanderbilt University and Verizon Investment Management, as well as state pension plans and foundations.
Fremont Partners III plans to make investments in operating companies with values of up to $1 billion. Depending on the specifics of each deal, Fremont will typically invest between $50 million and $250 million into companies with sound business franchises, substantial unrealized potential and proven management teams.
“We look for high-quality companies, strong margins and the ability to get high returns on capital. We do that by really focusing on partnering with a company rather than just buying it. For every $250 we have invested, the companies’ founders have put in $1 alongside,” Williamson said. “We like those types of situations. Clearly our incentives are aligned – if a management team is leaving that much money in the company they need to succeed as much as we do.”
Fremont’s portfolio companies have invested a total of $5 million into the new vehicle.
The fund is expected to invest across a range of industries, including business services, financial services, consumer products, industrial products, building products, packaging, and health care. Williamson said Fremont Partners III will also target business with leading market positions, strong organic revenue growth supported by sustainable trends, attractive Ebitda margins, high returns on tangible capital, strong free cash flow and investment commitment from management.
Additionally, although the new fund hasn’t made any investments yet, Williamson said Fremont is actively looking for deals, and the fund should be fully committed in about four years. “But you never know for sure. Four years is our target, but if it’s not the right deal, we won’t do it to be committed in four years’ time. We’ll wait until we find deals that meet our criteria,” Williamson said.
As for returns, while it clearly depends on the situation, Williamson said that Fremont probably aims for a 25% return on its deals.
Founded in 1991, Fremont Partners’ two previous funds are fully committed. Fremont Partners is sponsored by its investment professionals and Fremont Group, which is a private investment firm that is majority owned by members of the Bechtel family, who invested $287 million with Fremont Partners III.
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