Prophet Equity Appears Poised To Beat $250M Target

Firm: Prophet Equity

Fund: Prophet Equity I

Target: $250 million

Dallas-based Prophet Equity has already accumulated indications of interest exceeding the $250 million target for its first fund, a source has told, the sister Web site of Buyouts. The firm, which was formed by Ross Gatlin and George Stelling in December 2007, launched fundraising in July.

Gatlin was one of the founders of Insight Equity, a turnaround shop that’s also based in Dallas which he split with just prior to Prophet Equity’s formation. He declined to comment on his reasons for leaving Insight Equity, except to say he did not believe in firms raising the size of their funds with each progressive fundraising. Insight Equity has significantly boosted the size of its latest effort, coming to market with a $500 million target for its second buyout fund after closing its debut 2005 fund at $300 million. Insight Equity is also raising a new mezzanine vehicle with a $275 million target, according to a previous Buyouts report.

Gatlin, who declined comment on the status of fundraising, said Prophet Equity’s strategy calls for a permanent hard cap on fund size of $250 million, a larger than usual general partner commitment of up to $50 million, and wide distribution of carried interest among investment professionals. The firm looks to make equity investments of between $5 million and $50 million. It’s open to a wide variety of deals, including corporate carve-outs, stalking-horse bids and turnarounds as well as control acquisitions. The shop’s industry focus is broad, including automotive and transportation, consumer products, defense and aerospace, health care, financial services, and manufacturing. It looks at companies with annual sales of up to $500 million. Deals typically have enterprise values ranging from $10 million to $250 million.

Gatlin believes that the lower middle market has the most fertile deal opportunities. “It is the largest addressable market in the U.S.,” he said. “Ninety eight percent of available companies have revenues between $20 million and $500 million.” Gatlin also said his firm is committed to making operational improvements to what it determines are fundamentally sound businesses. The firm doesn’t outsource and requires partners to possess financial engineering, operational, and diagnostic skills.

Alignment of interest is so important to Gatlin that the firm distributes carried interest to the entire team, right down to administrative positions. “Every single person on our team has their number one goal as driving value creation, and people generally do what they’re paid to do,” he said. Prophet Equity’s employees all have access to co-investment opportunities, as well.

Gatlin and Insight Equity founder Ted Beneski gained restructuring experience at Bain & Co., until 2000, when Gatlin launched a distressed investment strategy at The Carlyle Group. Gatlin and Beneski then formed Insight Equity in 2002.