Prophet Equity captures $255.6 mln for Fund II, expects final close in May

The firm, which debuted with a vintage 2008 fund of $271 million, launched the successor around the start of the year when CEO and Managing Partner Ross Gatlin sent out some 15 to 20 PPMs to potential investors. The first close followed in late March and included a $20 million commitment from the general partner.

Gatlin said he expects to wrap up the fund in late May at the $345 million hard cap (including the GP commitment) after dealing with the tricky issue of how to size the remaining allocations. “Not everyone will get the allocation they want,” he said, given that “indicated demand” is “much greater” than the $89 million hole left to fill. 

The investor base of Fund II includes international banks, pensions and funds of funds, along with domestic endowments and funds of funds. Return investors include Danske Private Equity and Industriens Pension. The minimum commitment to the fund is $5 million, according to a regulatory filing, which puts the number of investors in the first closing at 13. (The firm is not using a placement agent.)

Fundraising appears to be clicking on the strength of a 15-year track record that Gatlin promotes spanning three partnerships. Over that time Gatlin, who did a stint at Carlyle Group earlier in his career, said his team’s efforts have generated more than 5x invested capital and a gross IRR of more than 65 percent. In all, more than $400 million invested in control equity in the lower middle market has generated over $2 billion in value, much of it realized, he said, adding that Prophet Equity’s debut fund is performing right in the same neighborhood.

Prophet Equity takes an especially hands-on approach to its purchases, investing $5 million to $50 million at a time for controlling equity positions in underperforming, asset-heavy companies generating annual revenue of up to $500 million. Industries of interest include aerospace, automotive, consumer products, defense, financial services, healthcare, manufacturing, natural resources and transportation. The firm has an appetite for corporate carve-outs, divestitures, special situations, recapitalizations and turnarounds. Its website lists 11 portfolio companies, including Tafford Uniforms, a supplier of medical uniforms and accessories.

Prophet Equity has 12 executives, including Managing Director Pelham Smith, General Counsel David Rex, and Marketing Director and Head of Investor Resources Stephanie Fine, according to its website. Some seven of the eight senior executives active on Fund I remain with the team, said Gatlin. The firm is looking to add two to three analysts, each with at least two or three years of experience.

George Stelling, a co-founder who had been COO of the firm, left in 2011 in a not-amicable departure that led to litigation between Stelling and his old firm last year.

Gatlin recalled that in Prophet Equity’s first PPM, sent out around June 2008, he had projected a major downturn to hit the economy in coming months. At first investors were slow to show interest in the fund. ”Around September the phones started ringing, and they still haven’t stopped,” he said. ”Calling that correction has led to a lot of good things.”

And this time around? Gatlin said he’s not predicting “as massive-looking a correction” as last time. “But there’s no question there will be some set of events that will get everyone concerned again and represent another opportunity to invest in good businesses that need smart capital…to assist them.”