Leverage-Light Strategy Lifts New Mountain To $5.1 Billion

New Mountain Capital intends to close shortly on $5.1 billion for its third fund, a partnership that resonated with investors in part due to a strategy that’s light on leverage. The closing highlights a strong run of capital-raising for the seven-year-old firm, which has gathered more than $6.5 billion from investors in the past three years.

The firm has raised about $5 billion for New Mountain Partners III, well past the $3 billion target. A few final LPs are expected to meander into the fund over the next few weeks to hit the hard cap on the nose. Meanwhile, the partners themselves have put $100 million into the fund. The fund carries a 1.75 percent management fee, a 20 percent carry and an 8 percent preferred return.

Founded in 2000 by Steve Klinsky, a Ted Forstmann protégé, New York-based New Mountain far more than it had for its previous fund, the 2005 $1.55 billion New Mountain Partners II. The 2000 debut fund garnered $770 million. New Mountain formally began raising the third fund in April with Credit Suisse as the placement agent.

One of the most attractive aspects of the fund this time out was the firm’s equity-heavy investment style, which in the past was a deterrent to some investors. Some three-quarters of its portfolio companies began with no debt, and some have remained without it. According to a person familiar with the firm, a number of LPs reviewing the second fund balked at the strategy, accusing the firm of leaving money on the table. This time, with the fundraising coinciding with the collapsing debt markets, the equity-heavy strategy appeared to be a good counter-cyclical investment. LPs turned out in droves.

Another reason for LPs to perk up is IRRs. New Mountain targets 30 percent IRRs. As of the end of 2006, New Mountain’s first fund had generated a 63.6 percent gross IRR on realized investments, and a 39.4 percent gross IRR on all investments, even assigning no value to the remaining portfolio. Meanwhile, the firm’s second fund has already achieved a gross IRR of 51.7 percent. Three of the five companies that the firm backed with the second fund during 2005 and 2006 have already filed to go public, and one of them has paid back much of the initial investment in cash, according to a source familiar with firm.

Highlights form the first two funds include investments in Strayer Education, a post-secondary and on-line educator based in Arlington, Va.; Surgis Inc., a surgical services company in Nashville; and Deltek Inc., an enterprise applications software provider in Herndon, Va.

For Fund III, the firm went back to a faithful stable of investors including California Public Employees’ Retirement System, which put $150 million into the second fund. Other previous New Mountain investors include Florida State Board of Administration, Los Angeles Fire & Police Pension System, Ohio Public Employees’ Retirement System, Pennsylvania State Employees’ Retirement System and Oregon State Treasury.

New Mountain typically puts $100 million to $500 million into its deals, and claims to have never bought a company in a sealed-bid auction. Industries it likes include education, health care, business services, federal IT services, media, software, consumer products and energy.

An affiliate of the firm also recently took an activist minority position in one public company. New Mountain Vantage Advisers just settled a proxy fight with Williamsville, N.Y.-based, $3.8 billion market cap National Fuel Gas Company, in which it shares a 9.7 percent stake, in tandem with CalPERS. New Mountain Vantage Advisers put up three directors for election in February, arguing that the firm’s corporate governance is “outmoded” and that it should drill on or sell a large tract of valuable land it owns in the Appalachian Mountains. In late January, the company agreed to expand its board to eleven members and include one of the directors on New Mountain Vantage Advisers’s slate.—M.C.