KPP Builds Institutional Base

Firm: Key Principal Partners

Fund: KPP Investors III LP

Target: $500M

Amount Raised: $435M

Placement Agent: None

Legal Counsel: O’Melveny & Myers LLP

Mezzanine provider Key Principal Partners has not bowed out of the market while second lien lenders flood in with less expensive financing options. In fact, deal flow for the Cleveland-based firm has been so robust, that KPP was forced to take a break from raising its third fund in order to put some of its dry powder to work.

KPP Investors III LP, with a cap set at $500 million, recently held its initial close with $435 million already in its coffers. A final closing is expected sometime in the third quarter for the firm, which is not enlisting the help of a placement agent.

Though KPP considers itself a mezzanine shop, it largely invests in sponsorless transactions, meaning it often invests directly into a company, sans an equity sponsor. However, it is not outside the firm’s mandate to invest mezzanine debt alongside another private equity firm or even for it to pursue an investment that would give it a control stake.

John Sinnenberg, CEO of KPP, said the firm had to start drawing down capital from the new fund to furnish four new investment opportunities that are scheduled for take place either this month or in June. Of the quartet in Fund III’s pipeline, two are non-control mezzanine investments, one is a growth-equity tranche and one is a control equity play. Fund II, meanwhile, still has one investment left to make.

The lion’s share of Fund III’s capital commitments came from KPP’s parent company KeyCorp, which threw $300 million of its own money into the fund. The firm is hoping that outside investors will make up the difference, and so far they’ve collected $135 million in limited partner commitments. Sinnenberg declined to name any of the fund’s investors, which include funds of funds.

Compared to the $520 million KPP Investors II LP, Sinnenberg said, “Fund III is a lot more institutionally friendly.” The firm’s second fund only closed on $78 million in third party capital—above target but still less than what might typically appeal to institutional investors. “It’s hard to get any institutional interest with a $75 million target,” Sinnenberg described.

KPP’s focus on the sponsorless side of mezzanine investing stems from its belief that the solo approach offers greater risk-adjusted rates of return, utilizing less leverage than the transactions generated by buyout firms. Furthermore, being open to sponsorless investing increases deal flow since the lender is no longer limited to investing in companies that are formally up for sale.

The risks, however, are greater, too. “In the sponsorless market, you are asked to think and perform like a control guy while accepting a non-control position,” Sinnenberg said. “When something goes bump, you have to act.”

The new fund, like its predecessors, does not have any allocation requirements when it comes to sponsorless or sponsored transactions. KPP typically invests between $5 million and $40 million in manufacturing, distribution or service-oriented companies with sales of between $25 million and $250 million and cash flow of at lease $5 million.

Including capital contributed by KeyCorp, KPP has invested in 36 companies, deploying nearly $470 million in the process. KPP has approximately $2 billion of capital under management, according to the firm. —A.N.