Minn.-based Boutique Slashes Fund IV Target

Firm: Spell Capital Partners

Fund: Spell Capital Partners IV LP

Target: $40 million (originally $150 million)

Placement agent: None

Spell Capital Partners LLC, a Minneapolis-based firm that acquires small manufacturing companies, has dramatically cut its fundraising goal for its fourth fund in part because of looming regulations that would have most buyout funds register with federal regulators.

Last year, the firm had hoped to raise as much $150 million for the fund. The idea was that a larger pool of capital would enable Spell Capital to rely less on mezzanine financing and to buy six or seven portfolio companies, as opposed to the three or four portfolio companies its earlier funds could support.

But after speaking with some large pensions and other institutional investors, its executives determined $150 million was too big a jump for the firm, which has five investment professionals. The firm closed its third fund at $57 million in 2006. Prior to that, it managed a $25 million pool that closed in 1998. “We determined that the target was too big of a jump,” Jim Rikkers, a managing director at the firm, told Buyouts. “We’d have to change the way we do business and do bigger deals.”

Firm executives were also concerned with Dodd-Frank financial reform requirement that firms managing $150 million or more register as investment advisers with the Securities and Exchange Commission, which likely would have required Spell Capital to hire an outside compliance officer. By only raising as much as $40 million, the firm will stay below that threshold. “We considered not doing a fund and simply investing our own money,” Rikkers said. “We ended up doing a hybrid. Approximately a third of the fund is our money.”

Spell Capital has so far raised $32 million for the fund. It is not using placement agent to help raise the capital

Founded in 1988 by William Spell, a veteran of the regional bank John G. Kinnard & Co., Spell Capital typically cuts equity checks of $3 million to $20 million to acquire profitable manufacturing businesses, then expands them through add-on acquisitions. Targets tend to generate revenue of at least $10 million and EBITDA of at least $2 million.