MiddleGround gears up for third fundraising cycle, introducing debut ESG pool

MiddleGround will be entering a fundraising market that has not been kind to newer managers.

MiddleGround Capital, which has grown quickly from its early roots as a first-time manager targeting investments in industrials and manufacturing, is preparing its next fundraising round that will target $2 billion, a person with knowledge of the firm told Buyouts.

MiddleGround will be entering a fundraising market that has not been kind to newer managers. Fundraising is slumping and limited partners are mostly content to stick with their deepest relationships, eschewing funds from less established shops.

“If you’re new in the market, or raising a first-time fund, you might have been getting capital for those before, now those are very challenging,” said Hugh MacArthur, chairman of the global private equity practice at Bain & Co.

Still, MiddleGround has followed a steady path upward. The firm, based in Lexington, Kentucky, with offices in New York and Amsterdam, now manages more than $3.3 billion, including co-investments. The firm has invested around $2 billion and has returned around a third of that back to LPs, even without full realizations, the source said. This is achieved through structures like dividend recapitalizations, selling off non-core assets and cash flowing from the businesses, the source said.

Founded by John Stewart – a former partner at Monomoy, along with ex-Monomoy directors Lauren Mulholland and Scot Duncan – MiddleGround will target $1.2 billion for MiddleGround Partners III, $500 million for its second specialized “mobility” fund and $300 million for its debut ESG-focused fund.

In a switch, the firm will work with Lazard on the fundraising, rather than Credit Suisse, with which it has worked since the beginning, the source said.

The firm closed its second flagship on $800 million and its debut Mobility Opportunity Fund on $459.5 million in 2021. The mobility strategy focuses on investments in companies in disruptive automotive industries, including the electrification of the powertrain, vehicle light-weighting, connected vehicles and autonomous vehicles.

The mobility fund acts as an overage fund, investing alongside the flagship pool. The debut ESG fund, which the firm is calling its Industrial Revolution strategy, will be a standalone vehicle, the person said.

The ESG strategy will focus on companies producing products that will be necessary many years from now, like steel, concrete and chemicals, but that are generally considered to have poor track records on environmental protection, working conditions and worker pay, the person said.

The firm believes it can use its operational experience to affect upgrades to these companies’ ESG profiles, including facility upgrades like introducing automation of certain processes, increasing safety and improving wages for employees, the person said.

While the general investment team will run the ESG fund, MiddleGround has recently been building out an ESG-focused team, including bringing on Mike Bridge as a managing director for data operations and Madelyn Tutewiler as vice president in ESG.

Tough enough

Stewart spent many years at Toyota, working his way up from the factory floor, where he worked the second shift installing bumpers on the Toyota Camry, to leading the automobile manufacturer’s largest division in Europe, as outlined by Buyouts.

MiddleGround’s commitment and experience in operations is a story that resonates well with potential LPs. It’s this expertise that has helped MiddleGround’s rapid growth and its ability to find companies in need of more sophisticated advancements in operations.

This focus has likely become more important than ever as debt has become more expensive and the easy returns of the past decade will now be much harder to achieve. A focus on operations, according to several sources, will be key to strong performance.

“The vehicles getting funded in this environment are those that can help LPs meet specific objectives through true expertise in a narrow slice of the market,” according to Bain & Co’s annual global private equity report.