H.I.G. Capital seeks up to $1 bln for fund of funds earmarked for its own funds

H.I.G. Capital, a popular mid-market buyout shop that has diversified into ancillary strategies, is targeting up to $1 billion for a fund of funds. The fund appears to be designed to guarantee investors allocations in 12 of H.I.G.’s own funds as they launch over the next four years.

Founded in 1993, H.I.G. Capital has enjoyed success investing in middle-market companies with enterprise values of $50 million to $500 million. This focus has meant that the firm’s funds have remained far from megafund size, potentially limiting the amount of money that individual investors can commit.

H.I.G. Strategic Partners Fund, earmarked for both fund commitments and co-investments, addresses that problem.

Texas Municipal Retirement System is on board, having committed $200 million to the new fund (as well $100 million for a related co-investment pool). So is State Teachers Retirement System of Ohio, which made a minor commitment to the fund in April of this year.

In late June, Chris Schelling, director of private equity at the Texas pension, delivered a presentation advocating for H.I.G.’s investment strategy to the board of directors.

According to a report describing his recommendations, “H.I.G. is currently raising SPF to provide a select group of their limited partners the opportunity to lock in allocations to their oversubscribed fund lines, while building in diversification across their strategies to create an attractive risk-adjusted return profile.”

H.I.G. Bayside Loan Opportunity Fund IV, H.I.G. Brazil & Latin America Partners, and H.I.G. Middle Market Fund II are among the private equity firm’s most recently launched funds.

Schelling confirmed that the board voted in favor of his recommendations. He declined to comment further on the matter, citing that his team is “still in negotiations with the manager.”

H.I.G. Capital has acquired more than 300 companies and invests across the spectrum, including leveraged buyouts, growth equity, special situations, credit, direct lending, and real estate.

According to filings with the SEC, Strategic Partners Fund launched in September 2017.  Among the fund’s managing directors are Co-Founders Sami Mnaymneh and Tony Tamer, and Chief Compliance Officer Richard Siegel.

None were available for comment on the status of fundraising or the economic terms. At this stage, it is unclear whether investors will have to pay two tiers of fees, but the fund’s Form D estimates that $90 million of the targeted $750 million will be paid to the underlying funds as management fees. No mention was made of fund expenses or carry fees.

The document also notes that the general partners may exercise discretion in how much they are willing to accept in commitments, regardless of whether it exceeds or falls short of the official target. Texas Municipal Retirement System puts the fund’s target at $1 billion.

Institutional investors have been trying to find ways to put more money with favored fund managers. In December 2011, New Jersey Division of Investment launched a $1.8 billion separate account with Blackstone Group, the single largest commitment in the firm’s history until that point. New Jersey self-estimated that it stood to save more than $120 million in fees over the lifetime of the relationship.

Similar deals were struck with Kohlberg Kravis Roberts and Apollo Global Management that same year when the Teacher Retirement System of Texas made two individual commitments to those firms worth $3 billion each.

H.I.G. Strategic Partners Fund is different in that unlike a separate account, it does not have a single institutional investor. It has several.

“This would look more like a fund vehicle than it would a separate account,” said Kelly DePonte, managing director of placement agent Probitas Partners.

“It’s unusual, but might be a foretaste of things to come. You typically don’t have a vehicle like this that would also take on smaller investors.”