LP Profile: Hall Capital Warms To Small Buyout Funds

A window of opportunity has opened for small buyout shops fundraising on the strength of exceptional track records: Hall Capital Partners LLC is looking for just such firms this year.

The money manager for wealthy clients, foundations and endowments is looking to commit roughly $200 million to $250 million this year to private equity funds, said Kirk Dizon, a managing director who co-heads the private equity group along with Jessica Reed Saouaf. Although the team last year committed $220 million to buyout, growth and distressed funds, pledges went mainly to emerging market and distressed vehicles, rather than to buyout funds. The firm felt little urgency to get into the buyout market since very few deals were being done.

Now, however, Dizon feels the time is right to jump into small buyout funds because firms he’s been tracking for years can show whether or not they created bottom-line and top-line growth in their portfolio companies during tough economic times. “We’re looking very closely at several of these managers whose stories have gotten better over time because of their particular strategies and the companies they’ve invested in,” said Dizon.

Hall Capital has $2.5 billion of private equity assets under management, both through direct fund commitments for its clients and via dedicated funds of funds totaling about $300 million. Although the group just promised more than $100 million to three China funds, Dizon said the firm will probably make five to seven pledges to U.S. buyout shops in 2010, depending on who comes back to market. Expect two or three of those commitments to go to new relationships. Hall Capital’s average pledge size is $10 million to $25 million for a small fund.

Hall Capital has active relationships with about 60 private equity general partners, ranging from mega-buyout firms to seed-stage venture capital shops, but that number could grow eventually to 75. “There will always be new and evolving models,” Dizon said. Some of its GPs include middle-market buyout firm Ares Management; mega-firm Hellman & Friedman; JC Flowers & Co., which focuses on financial services; Nordic Capital, a Northern Europe buyout firm; Oaktree Capital Management, a specialist in distressed securities; Thoma Bravo, which invests in the software, business and education sectors; and Varde Partners, a credit, distressed and special situation investor.

What It Takes

So how do you get a slug from Hall Capital? First, Dizon wants to feel sure that he’ll get at least a 2.5x net ROI and a 30 percent IRR by committing to a smaller buyout fund, so the first cut is based on performance, as well as on a shop’s access to deal flow and its strategy in relation to the economic environment. Although Dizon is agnostic about industry focus, he wants to see a refined and well-articulated strategy that is repeatable and has the requisite performance history. About starting a new relationship with a buyout manager, Dizon noted, “If you want to unseat an incumbent, you have to win by knockout,” so a new firm would have to show that it has a better track record, strategy and team than the competition.

And, especially for a small buyout firm, Dizon wants to know that deals will be less competitive and better priced, and that there is plenty of lower-hanging fruit in the form of obvious fixes that a GP can make to a portfolio company. These can include ones as basic as implementing modern software and accounting systems.

Dizon believes that small shops have less room for error in working with smaller companies, as well as fewer avenues for exit. Also, most small buyout shops inevitably become larger, making it harder to find one with a long track record that hasn’t moved upstream. Another challenge of backing small firms is that they often have very narrow geographic or sector focuses, so “you would have to deploy a number of bullets,” said Dizon. In other words, if Hall Capital commits to a southwest-focused firm, the firm might then feel compelled to balance that with a northeast-focused firm.

Many small buyout shops in fundraising mode, as well as placement agents, make it a point to swing by the San Francisco office of Hall Capital on their road shows through California. Others often appear on Hall Capital’s radar screen via introductions from clients, many of whom are big names in private equity, hedge funds, investment banking; the firm also boasts connections to well-known entrepreneurs, and to investment officers in the world of endowments and foundations. Dizon and his team have met with more than 100 managers in the small-buyout-fund market over the past three years through their various networks.

Dizon and his private equity team are now intensely scrutinizing four buyout funds with whom the firm would like to commit capital, all of which fall into the $250 million to $500 million target range. But, “the window is short” to get access to these funds, said Dizon. He noted that these are very desirable teams whose funds previously were quite difficult to get into but who now have “pockets” available for new LPs because their previous backers either can’t re-up or can’t commit as much as before. All of the funds will close or at least require a firm commitment by the end of March. Some of them hit the market in 2009, and some only began fundraising this January, but already “space has become limited,” said Dizon. “We thought they would stay open until the third quarter, but then people started committing, so it’s been busy.”