Heritage Looks to Build Legacy with Third Fund –

Adding to what has already proven to be a robust start to 1999’s fund launches, Boston-based Heritage Partners last month began marketing its third buyout fund, said Michael Gillagan, a Heritage general partner.

Heritage Fund III, L.P. will feature a target of $750 million, although it likely will round up more than the stated goal. The fund’s terms include an 80%/20% carried interest split and a 2% management fee on the first $500 million of invested capital that scales back to a 1.5% fee thereafter. The fee structure is similar to prior Heritage funds, including Heritage Fund II, L.P., which closed on $380 million in 1997 (BUYOUTS April 21, 1997, p. 7).

Partners at Heritage will contribute 1% of the fund’s total capital; the group had considered increasing the G.P. stake to 2%, Mr. Gilligan said, but partners at Heritage decided against the increase. “We didn’t this time because, the way we have been deploying capital, a lot of our after-tax money gets plowed back into investments,” he said.

G.P. Commitment Stays at Historic Level

The decision not to increase the G.P. stake will exclude at least one former limited partner from the roster for Fund III. Although Pennsylvania Public School Employes’ Retirement Sytem was a prior limited in Fund I, Mr. Gilligan said the pension changed its rules on investing in buyout funds-requiring general partners to contribute at least 5% of the capital to any buyout funds under consideration-just as Heritage had begun marketing Fund II. Although partners at Heritage had approached PSERS about investing in Fund III, Mr. Gilligan said the pension was unwilling to alter its mandate. Other prior L.P.s include Goldman Sachs Asset Management, New York State Common Retirement System, Virginia Retirement System, Nassau Capital L.L.C., Hillman Cos., University of Richmond, Bank of America, NationsBanc, BankBoston and Fleet Bank, Mr. Gilligan said.

As with most other buyout funds that have nearly doubled in size over the last few years, Mr. Gilligan attributed the increase in target size to robust deal activity, adding that Heritage will continue to troll the middle-market for deal flow. “Our first fund, which was $150 million, was three-times the amount we had put together previously, and that took us two-and-a-half years to invest. With Fund II, once again we will have deployed the majority of its capital in the next two months,” Mr. Gilligan said, adding the firm would like to spend more time looking for deals and less time coming to market in the future.

To spark interest in the fund, Heritage over the last year has built its principal line-up. In the last three months, Peter Jeton, formerly involved in lending with BankBoston, joined the group as chief financial officer. The rest of Heritage’s lineup includes General Partners Mr. Gilligan, Michel Reichert and Peter Hermann; Partners Brook Parker, Mark Jrolf and Mark Sullivan, as well as two vice presidents, one associate and one analyst9