New LPs Crowd Into Riverside’s Latest Fund

Firm: The Riverside Co.

Fund: Riverside Capital Appreciation Fund V

Target: $900 million

Amount Raised: $1.17 billion

The Riverside Co. has significantly widened its investor base with its latest fund. Despite an effort elongated by the financial crisis, the New York-based firm, known for being an active investor in the small end of the middle market, recently wrapped Riverside Capital Appreciation Fund V at $1.17 billion, bringing the pool in 30 percent above its $900 million target.

Forty-five percent of the limited partners this time around were first-timers, a figure that wasn’t necessarily the goal when the firm began the fundraising effort in March 2008.

“If not for the credit crunch, the breakdown probably would have been between 60-65 percent re-ups,” said Béla Szigethy, co-CEO of the firm along with Stewart Kohl. That was roughly the ratio for Riverside Capital Appreciation Fund 2003, the prior incarnation of the firm’s original product, which closed in March 2004 with $750 million in commitments.

Szigethy said the firm would likely have been able to close on Fund V in December 2008 if not for the historic turmoil that gripped the public markets in September 2008 in the wake of Lehman Brothers’s descent into bankruptcy.

In the press release announcing Fund V’s closing, Kohl referred to the current environment facing capital-needy general partners as the “worst fundraising market since dinosaurs roamed the earth.” Expounding upon the stages of that market in the past six months, Kohl said the beginning of 2009 was mostly marked by continued LP concerns about how far the public markets would fall, the subsequent impact of the denominator effect, and the lack of exits. Another hurdle was what he referred to as ‘secondary night fever’ as tales of tremendous discounts on the secondary market gave LPs pause when it came to new commitments.

“The question was why make primary pledges if you can get access for a discount elsewhere?,” he told Buyouts. In the final stretch, Riverside gathered $270 million in commitments, corresponding with the amount by which it exceeded its target by.

LPs committing to Fund V include Illinois State Board of Investment, Massachusetts Mutual Life Insurance Co., Oregon State Treasury, the City of Philadelphia Board of Pensions and Retirement, and University of Washington. Public pension funds accounted for the majority of investors (44 percent). Endowments and foundations made up about 12 percent of the LP base, while funds-of-funds managers, other types of pension plans and insurance companies each accounted for 9 percent. The mean pledge was around $20 million. The firm itself provided 5 percent of the capital, as is its custom.

As for deal flow, Riverside is setting an impressive pace. It’s notched seven deals already in 2009. In a typical year, the firm invests about $450 million, spread between North America ($250 million), Europe ($150 million), and Asia ($50 million). It expects to put about two-thirds of that amount to work this year. Fundraising continues for Riverside Asia Fund I, the shop’s first pool dedicated to investment in that region. The fund has a $100 million target and pledges totaled $27 million after it closed on $12 million worth of commitments in March, according to Thomson Reuters data.

The shop is already investing out of Fund V with four deals on the books so far, including its acquisition of Sencore Inc., a Sioux Falls, S.D., designer of broadcasting instruments, in late January. Riverside’s most recent transactions came on June 1 in the form of an add-on and an exit. The add-on, also a Fund V deal, was the purchase of Miller Claims Consulting Inc., a Plymouth, Ind., company that provides exterior siding matching services, for its I-TEL Laboratories platform.

The exit was the sale of Nordco, an Oak Creek, Wis., maker of railroad track equipment, to OMERS Private Equity. That transaction yielded a 5.1x gross cash-on-cash return and a 31 percent IRR, according to Riverside’s press release. Nordco was a cross-fund investment between 2000 Riverside Capital Appreciation Fund, a $413 million pool, and RCAF 2003.