Ignoring the possibility of a sophomore slump, KRG Capital Partners LLC recently announced a cap busting final close on $450 million for its latest vehicle, KRG Capital Fund II LP, said Mark King, a managing director at the firm.
Denver-based KRG initially launched fund raising for the vehicle with a target of $300 million in January 2001. The fund held a first close on $167 million in April 2001 and interim closes at $330 million in January of this year and at $433 million in February.
King attributed the successful fund-raising efforts for Fund II to the fact that potential limited partners were impressed with the firm’s strategy of focusing on lower middle-market companies and its value-added approach. “Our value-add comes down to our domain expertise in health care and infrastructure, our focus on industry consolidations and our in-house people who can help our portfolio companies improve their operations and efficiency,” King said.
The new fund will likely invest in nine to 10 platform companies for a total of 40 to 50 acquisitions including add-ons, King said. KRG will look for highly profitable companies in certain parts of the health care, infrastructure, logistics, education and life sciences industries, he added. The firm invests using a top down approach, first looking for marketplace trends and then drilling down into those trends to find investment opportunities, he said. KRG will pursue deals nationwide.
Fund II’s first deal, for Tampa, Fla.-based Diabetic Supply, is an example of this process, King noted. KRG acquired the mail-order provider of diabetic and respiratory supplies in February for $16 million, and committing a total of $40 million to the company’s consolidation strategy. “The trend we saw is that our country’s population is aging and over-weight, which means more and more people are going to need the products Diabetic Supply offers,” he explained.
KRG has signed a letter of intent to acquire another platform health-care company, he said.
KRG used J.P. Morgan Chase as a placement agent for the vehicle because the firm needed someone to help organize the fund raising process and secure introductions to new investors, King said. The agent helped KRG tap several new sources of capital, including European limited partners who provided almost 20% of the fund’s capital. KRG had no European investors in its previous vehicle, the $202 million KRG Capital Fund I.
New LPs in Fund II include Duke Management Co., ING, WestAM Private Equity Group, Allianz, Credit Agricole and HFI Private Equity. Returning LPs include Pennsylvania Public School Employees’ Retirement System, AIG Global Investment Group, GE Capital Merchant Banking Group and Bank of America.
In order to help manage the new fund, KRG has added two associates to its team, as well as hiring John Lanier as a partner and chief quality control officer. to head up the firm’s quality and integration efforts. “Any kind of management need relating to quality or integration our portfolio companies have, he will be there to help facilitate,” King said, adding, KRG ultimately plans to hire two more professionals for Lanier’s team. Previously, Lanier had spent four years at GE Capital as a six sigma master black belt (quality control leader/teacher) and integration team leader. He was also the president and chief operating officer of one of GE Capital’s divisions, GE Capital Commercial Funding.
KRG now has a total of 16 investment professionals. The new vehicle has an 80%/20% carried interest split, 2% management fee and 8% hurdle rate.