The Motor City was the home of a recent fund closing that, yet again, underscored the appeal of the lower middle-market. Early this month, Detroit-based Huron Capital Partners LLC held a $90 million first close on its $150 million targeted The Huron Fund II LP.
If Fund II meets its target, it’ll be packed with more than twice the amount of dry powder as its $72 million predecessor fund. So far, the replacement vehicle has only been marketed to limited partners that invested in Fund I, as well as to a “select handful” of investors with whom the firm has cordial relationships, said Huron Principal Brian Demkowicz.
A bulk of Fund II’s $90 million in commitments came from institutions including ABN AMRO, Hartford Insurance Co., Harris Bank and Roynat Capital, while the remainder comes from wealthy families and corporations as well as the Huron Executive Council. Past Huron investors include Bank of America, Comerica, Michigan National Corp. and National City Capital Corp.
To date, Huron has realized a gross annual rate of return approaching 50% after returning more than 75% of Fund I’s total called capital to its investors.
Returns aside, “LPs are concerned that firms are sticking to their knitting. A lot of people got burned because firms got ahead of themselves in terms of the amount of capital they’ve raised versus what they were able to successfully deploy. I think the limiteds are looking for middle-market funds that have shown a commitment to stay in the middle market-not go up market,” said Demkowicz, adding that Fund II has a hard cap of $175 million.
Huron is not alone. Late last month, Genstar Capital LP turned down more than $500 million in limited partner commitments so as not to bust the $475 million hard cap for its latest vehicle, Genstar Capital Partners IV.
But despite the amount of capital available for middle-market firms to scoop up, Huron has noticed that the fundraising atmosphere is not nearly as gung ho as it was during the last major fundraising cycle.
“It’s cooled down quite a bit in terms of the overall climate. Back in ’99, there was a lot of support for the lower middle-market, perhaps more so than there is today. Investors today are more selective as to where they’re putting their dollars. But that said, we have noticed a greater appetite for the lower middle-market today than there has been in the past couple of years,” Demkowicz said.
The final close date for Fund II is slated for sometime in the first quarter of 2005. Once fundraising comes to a complete halt, Huron plans to use the capital to invest in three to four companies per year with revenue of up to $200 million, committing an average of $15 million in equity to each. The fund’s broad equity investment range, however, will be between $5 million and $20 million, though the firm is willing to invest up to $40 million with a co-invest, Demkowicz said.
Of the 11 companies acquired with Fund I, six are still active investments in the firm’s portfolio including label manufacturer York Label Inc., school operator Delta Educational Systems Inc., consumer and medical product manufacturer Pristech Products Inc., apparel manufacturer and marketer Northern Cap & Glove Mfg. Inc., designer and fleet manager of wheel chairs and other mobility products American Mobility & Quest Services Inc. and distributor of Christian materials Riverside Distributors Inc. The nearest exit of any of these companies is about 18 months away, Demkowicz said.
Fund I has capital enough for one more investment, which the firm has already signed a letter of intent on. Aside from that, the fund will retain between $7 million and $11 million to accommodate add-ons for its portfolio companies.