Golub Capital is expected to announce today that it has closed on Golub Capital Partners IV L.P. with a whopping $800 million-four times the size of its previous fund. The New York-based firm’s last fund, LEG Partners III L.P., raised $200 million in 1999 and is fully invested.
But the increased size isn’t the only change with this new fund. First, there is a fundamental difference in the way Golub Capital earns its money. The new fund will not be charging a management fee on unfunded committed capital. “We will only be charging a management fee on assets that are earning money. We will not charge a management fee on capital that may or may be invested in the future,” said Lawrence Golub, founder of Golub Capital. “I don’t understand why LPs in debt funds should still be paying on unfunded capital. This fee structure is not long for this world.”
Perhaps this strategy will serve to keep Golub Capital, a junior lender, more competitive with the other products that are clouding its space. Public BDCs and hedge funds only charge a management fee on capital that has been put to work. “Unlike private equity, where they can still operate that way, the junior lien business is part of the financial services industry, and it has matured,” said Golub.
The other change is that with four times the amount of capital to invest, Golub Capital Partners IV will be making bigger investments. Although the firm will continue to do deals as small as $5 million, the top end of its range has expanded from $20 million to $40 million. “This range covers the majority of opportunities available. The size and the scale of our new fund is a direct reaction to what our private equity clients requested… They want to do more with us and would do so if we were larger and expanded our product offering,” said Andrew Steuermen, a managing director with the firm. “The private equity firms want to manage fewer relationships but make them deeper. Now we can step up and do more for them.”
The third change is a work in progress. In anticipation of the new fund, the firm promoted and added a total of five senior deal professionals to its team over the last 18 months, including David Golub, vice chairman; Steuerman, a managing director; principals Charles Riceman and Thomas Turmell; and Gregory Robbins, vice president. Additionally, the firm is still looking to hire a couple more deal professionals.
The Breakdown
Golub Capital Partners IV held its first close in August 2004 and its final close at the end of April 2005. While most of the firm’s investors are existing limited partners, it did manage to snag some new investors including Sumitomo Mitsui, the second-largest Japanese bank, and VCM Venture Capital Management GmbH, an institutional fund based in Europe. However, only one-third of the investor base is made up of institutional money; family offices and wealthy individuals make up the other two-thirds. What’s more, a number of Golub executives made a combined investment in excess of $10 million.
“Fundraising for us was easy. The new fee structure on funded commitments really persuaded people that we had a good business model. They don’t want their returns diminished in the investment wrap-up period,” said Golub.
Golub Capital has been investing out of this fund since August 2004 and has made 20 investments since then. Most of the transactions are either mezzanine financings or second lien financings. The new fund has a 10-year investment period and reserves the right to pay out profits but recycle the principal. The firm’s goal is to achieve full investment by 2007.
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