Norwest Raises Second Fund

The mezzanine market may be overcapitalized, but that has not stopped new funds from getting raised.

Last week, Norwest Mezzanine Partners closed its second fund with $400 million from sole limited partner Wells Fargo & Co. (NYSE: WFC), which is $150 million more than Norwest raised for its inaugural mezzanine fund in 2000.

The Minneapolis-based firm features a satellite office in Boston, and will continue to invest up to $40 million in middle-market buyout, recapitalization and growth-stage transactions. It also is willing to participate in second-lien transactions, even though a rapid increase in such structures is largely blamed for driving down overall mezzanine yields.

“We did one second-lien deal in the first fund, and we have the flexibility to do so again so long as the pricing and risk is right,” says Tim DeVries, a general partner with Norwest Mezzanine Partners. He adds that Wells Fargo is aware of lowered return expectations, but that the financial services company remains comfortable with the mezzanine asset class.

DeVries also serves as a general partner with Norwest Equity Partners, a Minneapolis-based buyout firm that made its first investment in 1989. Norwest Mezzanine is a standalone investment partnership that is affiliated with Norwest Equity Partners, DeVries estimates that between 20% and 30% of all Norwest Mezzanine deals are sponsored by Norwest Equity, and he sees no change in the relationship going forward.

Norwest Equity currently is working out of an $800 million fund raised in 1999, and plans to secure another $800 million from Wells Fargo in September.

Norwest Mezzanine, meanwhile, will immediately begin to put its second fund to work. The final Norwest Mezzanine Partners I investment occurred in March, when the group invested $7.5 million to support Milk Specialties Co.’s add-on acquisition of Buckeye Nutrition.

The first fund has achieved one exit – WARN Industries Inc., a maker of automotive components and accessories, was acquired by Dover Resources for about $325 million last year.

Norwest Mezzanine says it expects an additional three to five liquidity events over the next 18 months for Fund I.