PE fund briefs, week of April 5, 2010

Minneapolis firm sets sights on fourth fund

Spell Capital Partners, a Minneapolis-based firm that acquires small manufacturing companies, last month began raising its fourth fund with a target of $150 million, according to a source familiar with its plans.

The fund would mark a significant increase in fund size for the firm, which closed its third fund at $57 million in 2006. Executives say that a larger fund will enable them 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.

The firm started raising the fund in March and expects to hold a first close of about $75 million in the late summer or early fall. The firm has no plans to retain a placement agent for the fund.

Founded in 1988, Spell Capital typically cuts equity checks of $3 million to $20 million to acquire profitable manufacturing businesses, then expand them through add-on acquisitions. Targets tend to generate revenue of at least $10 million and EBITDA of at least $2 million. The firm also prefers to invest in companies whose management teams have worked together for a while.

Spell Capital’s most recent liquidity event came in December when it sold an undisclosed stake in portfolio company LAI International Inc., a Westminster, Md.-based company that makes components used in aircraft engines, power generators and defense systems, to RLJ Equity Partners.

Spell Capital’s most recent investment also came in December, when it bought Norshield Security Products, a Montgomery, Ala.-based company that makes doors that resist bullets and bomb blasts. —Bernard Vaughan

Wellspring raises $527M for fund V

Wellspring Capital Management has raised $527 million for its fifth fund as of March 12, according to a source familiar with the fund-raising effort. The target for Wellspring Capital Partners V is $1.3 billion.

Credit Suisse is helping the firm raise the fund, which executives at Wellspring Capital hope to close by June 30.

Wellspring Capital raised $1 billion for its fourth fund, which closed in 2005.

The New York-based buyout shop typically invests between $75 million and $150 million to acquire North American companies, though it can target deals as high as $2 billion. Although the firm invests in numerous sectors, it avoids telecommunications, technology, real estate and commodity-based businesses.

Wellspring Capital’s most recent deal came in September, when it sold Vatterott Education Centers Inc., a St. Louis, Mo.-based postsecondary trade school, to TA Associates. The firm scored a good return on the deal, having already recouped its $40 million investment in the company with a refinancing in May.

Managing Partner Greg Feldman, the former head of acquisitions at EXOR America Inc., the U.S. investment arm of the Italian corporation Agnelli Group, co-founded Wellspring Capital in 1995. —David Toll

DRI Capital goes past target

DRI Capital, a private equity firm that invests in drug royalty streams, has raised $600 million for its second fund, according to a source familiar with the situation.

The firm had targeted $500 million for Drug Royalty II, but has continued to accept new commitments. Investors in the fund include San Diego County Retirement Association, Arizona Public Safety Personnel Retirement System, Los Angeles Fire and Police Pensions, Louisiana State Employees Retirement System, New Mexico Educational Retirement Board and San Bernardino County Employees’ Retirement Association, according to Buyouts, an affiliate publication to PE Week.

DRI Capital raised $800 million for its first fund in 2006.

Investors like the fund because it has predictable cash flows and provides quarterly returns in the same way a mezzanine fund would, the source said. Further, DRI Capital follows strict guidelines for choosing drugs to invest in. The drugs must be FDA-approved, and are often for the treatment of chronic disease. This takes much of the risk and uncertainty out of the investments, the source said.

The fund may allow commitments of up to $700 million, which is the hard cap, according to Buyouts. —Erin Griffith