With a final fund closing and abundant exits from an earlier fund, things have been heating up at KRG Capital Partners this summer. Just two days after announcing the sale of its platform company HMS Healthcare Inc. to strategic buyer Aetna for $390 million, KRG Capital Partners closed its third private equity fund, KRG Capital Fund III, L.P., with a total capitalization of $715 million.
KRG began its fundraising efforts in December 2004 and exceeded its initial target of $600 million. The firm’s final push proved extremely lucrative, as its third fund last closed in April of this year with about $590 million in commitments.
Almost all of KRG’s existing limited partners invested in Fund III. The firm expanded its investor base, however, having gained additional support from state pension plans, universities and European investors.
Despite the current frenzied pace of activity at KRG, the firm does not plan to sit on its newly raised fund for long. “We expect to deploy in the next four to six years depending on how the market is,” said Mark King, managing director and co-founder of KRG.
KRG will look to invest anywhere from $20 million to $100 million in middle market companies with $6 million to $40 million EBITDA.
The equity will be used to capitalize on a number of existing economic trends and thus will be dispersed among a variety of sectors-healthcare, services and technology, outsourced manufacturing services and infrastructure projects, King said.
The firm has already signed letters of intent to acquire two Fund III platform companies within the realms of energy services and infrastructure services.
To some extent, KRG will deploy the fund in the same fashion as its fully invested second fund. Like many firms looking to cater to the ever-growing medical needs of the aging baby boom population, KRG has committed capital to healthcare related companies and will make investments from its third fund in life-sciences technology, healthy living products and healthcare services.
A Healthy Exit
KRG officially exited HMS Healthcare Inc. on July 19, to Hartford, Conn.-based Aetna. The publicly traded provider of health and benefits options nationwide, purchased the Preferred Provider Organization (PPO), which was put up for auction by UBS.
KRG created HMS, which is essentially a holding company, when it rolled three regional PPOs-Denever, Colo.-based Sloans Lake Preferred Health Network, Southfield Mich.-based PPOM LLC and Denver, Colo.-based Mountain Medical Affiliates-beginning in June 2004.
“About a year and half to two years ago we began looking in the HMO and PPO space with the idea of trying to build,” King said. “We had identified about half a dozen key add-on targets and we acquired three of the half a dozen in the first three months,” KRG partner David Kessenich added.
The three acquisitions cost KRG a total of $248 million, and the purchase price multiple for the exit was 9.3x EBITDA.
Although the three access networks maintained their own brands, KRG merged their back offices. “What we were integrating was the back office systems, which are very important because they are basically doing transaction processing,” King said. “We made those far more efficient and that was one of the big goals and gains of our consolidation activity.”
KRG managed to grow EBITDA from $8 million at the start of the first acquisition to over $40 million. According to Kessenich, that EBITDA was mostly acquired. “The organic EBITDA that we in essence realized from the synergies was 20% growth, all within a nine month period,” he said.
HMS was actively courted during that nine-month period, according to the professionals at KRG. “It was clear that the large strategics were very hungry for this asset and the healthcare space is moving very rapidly,” King said. “Pretty much right after we acquired PPOM the strategics began calling on us.”
Aetna was not the only large strategic on the prowl. Earlier in the month, United HealthCare announced its acquisition of PacifiCare, which came on the heels of its 2004 acquisitions of MAMSI and Oxford Health Plans.
This is the second healthcare related exit of the summer for KRG, which sold medical products manufacturer Civco Holdings Inc. to Roper Industries Inc. for $120 million in equity and assumed debt in June of this year.
KRG expects to complete anywhere from two to five more exits before the year is out. “We’ve got several companies that are on the market right now,” King said, “and we expect to have a number of exits between now and yearend.”