Heritage eyes new strategy for next fund

Heritage Partners is restructuring, after having strayed far from its strategy of taking significant minority stakes in family-owned businesses.

The Boston-based firm plans to spend the remainder of 2006 squeezing liquidity out of its existing portfolio, and then to begin raising between $300 million and $400 million for a new fund early next year.

But whether once-burned LPs will return remains unknown.

Heritage refers to its core strategy as the “private IPO,” whereby family founders receive some liquidity but retain managerial roles. It has proven successful, but recent returns for the overall Heritage portfolio have slumped due to an ill-advised foray into more traditional, large-market buyouts.

The shift was led by two of the firm’s three co-founders – Michel Reichert and Michael Gilligan – who believed that the firm’s investment sizes should grow somewhat proportionally to its fund sizes ($380 million in 1997 for Fund II to $850 million in 1999 for Fund III).

But the new strategy’s failure helped prompt Reichert’s retirement late last year, and Gilligan’s planned departure at year-end.

“There was a lot that didn’t work in the partnership dynamic, so we need a new approach,” says Mark Jrolf, a Heritage general partner who will help run the reorganized firm with remaining co-founder Peter Herman. Jrolf adds that only about 60% of the Heritage staff from September 2005 will remain by next year and that even the Heritage name could be discarded.

Jrolf believes that the firm’s “traditional” track record is still quite strong, and that reemphasizing such successes should attract new fund capital.

But he also acknowledges that he and Herman will be asked tough questions about why they signed off on non-traditional deals, and if their renewed focus is born of sincerity or expediency.

Charlie Gifford, a Heritage vice president, says that the firm still can make new deals with co-investment capital, and that it will relax a requirement that prospective portfolio companies have at least $75 million in annual EBITDA.

“I know it sounds cliche, but I’m very excited about the next year,” Gifford says. “It’s as if we’re rebuilding a brand, or even starting something new.”