LPs reward Atlas Holdings with performance-based carry

Firm: Atlas Holdings

Fund: Atlas Capital Resources II LP

Target: $650 million

Amount Raised: $900 million

Placement Agent: Capstone Partners

Legal Counsel: Proskauer Rose LLP

Atlas Holdings, a Greenwich, Connecticut-based turnaround specialist, will earn a premium 25 percent share of profits provided it beats a hurdle rate of return on its just-closed $900 million fund, according to co-founder and Managing Partner Andrew Bursky, who declined to describe the hurdle although Buyouts separately learned it is a 2.5x investment multiple net of fees. Otherwise, the terms are the conventional “2 and 20,” said Bursky — 2 percent management fee during the investment period, 20 percent carried interest.

Performance-based carried interests appear to be on the upswing. A survey of general partners conducted this summer found that nearly a quarter of North American buyout funds (24.5 percent) receive a higher rate of carried interest if the fund performs above a certain level. That is up from 7 percent in the survey conducted two years earlier. Vista Equity Partners, the San Francisco-based software specialist, negotiated a 30 percent carried interest in its fourth core fund, which closed in the spring of 2012, should the firm achieve a 3x investment multiple for investors.

Atlas Holdings has been spending some $50 million to $75 million in equity to acquire companies undergoing operational distress in such industries as building materials, energy, capital equipment, wood products and packaging. Many of the businesses it buys are going through bankruptcies, out-of-court restructurings or reorganizations of various kinds. The firm, founded in 2002, closed its debut institutional fund of $365 million in 2010, and set out to raise a successor with a $650 million target in September.

With backing from investors including ATPNorthern TrustRCP AdvisorsPrivate Advisors and Unigestion, the firm wrapped up the fund at $900 million in three months — far faster than the year to 18 months that many sponsors take, according to a source close to the firm. About half the capital came from re-ups, half from new investors, Bursky said.

Bursky pointed to the firm’s consistent track record, and reputation for top-decile vintage-year performance, as the source of its appeal to investors. Some sponsors may hit two or three home runs, have a dozen deals perform OK, and see a few losses. “That’s not us,” said Bursky. “We’ve had remarkably consistent performance across every business in each of our portfolios.” Among the keys to that performance, said Bursky, have been staying disciplined on price, finding once-strong performers with the potential for returning to peak performance, not leveraging companies at the outset to minimize financial stress, and returning capital early to investors from free cash flow and, in some cases, dividend recapitalizations.

An investor in Fund II said he likes how Atlas Holdings has ”two very strong, very capable leaders” who emphasize operational improvements and who have worked together since the 1990s — Bursky and co-founder and Managing Partner Timothy Fazio. The investor added that opportunities to find distressed companies in the lower middle market tend to be less cyclical than at the high end of the market; that bodes well for deal flow, even in a strengthening economy.

Atlas Holdings, which expects to own companies for five to seven years, owns 13 portfolio companies, eight of them in Fund I. Despite having no full exits from Fund I, the firm has returned more than half of invested capital within 18 months of the original investments, Bursky said. Portfolio companies include Finch Paper LLC, Forest Resources LLC and Soundview Paper Co LLC. The firm’s website lists 18 professionals on its management team, eight professionals on its operations team, and more than 60 operating partners.