Gores Group Starts Raising Small Cap Fund

The Gores Group, a buyout firm that oversees $3.8 billion across three funds, has started raising a fourth fund to tap opportunities among distressed situations at the smaller end of the market. The new fund, the Gores Small Capitalization Fund LP, has a $300 million target.

Information about the new fund was contained in memos from the San Diego County Employees Retirement Association, which finalized a $30 million commitment to the new fund at its Dec. 15 investment meeting, confirmed Yegin Chen, San Diego CERA’s head of private equity, in an e-mail message.

Terms of San Diego CERA’s investment include an annual management fee of 1.85 percent through 2014 (and 1.5 percent thereafter) as well as 20 percent carried interest. In addition, the Gores Group and its prior fund, Gores Capital Partners III LP, will account for up to 30 percent of the new fund’s commitments. The firm itself will commit up to 5 percent of the target, and as much as 25 percent of the new small cap fund’s money will come from Fund III in the form of co-investments.

The Los Angeles-based Gores Group was founded in 1987 by Alec Gores, a private equity mogul who is currently worth an estimated $1.9 billion and who ranks at No. 227 on the Forbes magazine list of the 400 richest Americans. Alec’s younger brother Tom Gores, the head of private equity firm Platinum Equity, is worth about $2.4 billion and is ranked at No. 159 on the Forbes list. Tom Gores recently bought a controlling stake in the Detroit Pistons basketball team.

While the Gores Group’s three previous funds have focused on turnarounds and distressed opportunities in the mid-market, the new fund is focused squarely on U.S. companies having less than $300 million in annual revenues and $20 million in EBITDA. Such companies, said one of the San Diego CERA memos, “have mature and sustainable business trends, but (their) value is underappreciated due (to) factors that may include poorly executed business strategy, financial stress, or mismanagement of assets.”

Although the Gores Group has made a specialty of investing in industrial, telecommunications and IT-related firms, the new fund plans also to invest in companies involved in consumer non-durables, such as clothing, food or office supplies.

San Diego CERA has invested with Gores Group before. The pension committed $75 million to Fund III last May. That fund ultimately raised $2.1 billion. Because Fund III launched so recently, it is too early to get a fair gauge on its long-term performance, but Fund II, which closed in 2007, has performed respectably, with a 13 percent IRR and 1.4x return multiple, according to Sept. 30 performance data from the Oregon Investment Council, which invested in Funds II and III.

Overall, San Diego CERA has $8.2 billion in assets as of June 30. The pension’s private equity target calls for 10 percent of its assets to be invested in the asset class. At $271 million, invested private equity capital accounts for just 3.4 percent of the pension’s overall assets, a level well below that 10 percent target. As a result, Chen said, “We are continuing to look for private equity fund managers with differentiated strategies, solid teams, and proven performance like the Gores organization.”