The Pennsylvania Public School Employees Retirement System is in talks with LLR Partners to commit 25 percent of the Philadelphia-based buyout shop’s latest fund, sources told Buyouts. That is the maximum PSERS is allowed to commit to a single fund.
LLR Partners is targeting $600 million for its third fund, a hefty increase from its $360 million second fund, closed in 2004, and its $260 million first fund, closed in 1999. The Pennsylvania pension, with $64.1 billion in assets, intends to commit $187.5 million to the new vehicle.
Based on glowing reviews from PSERS, contained in a briefing to the pension fund’s investment committee, LLR Partners has an attractive track record with which to coax previous investors and lure in new ones.
Fund I is fully invested and more than 80 percent of its portfolio has been realized, according to PSERS, generating a gross internal rate of return of 36.3 percent and 3.1x return on invested capital. It is expected to generate a gross IRR of 31.7 percent and 3x invested capital, yielding a net IRR of 23.3 percent and 2.3x capital after fees, when including the value of the remaining unrealized investments.
Fund II performance is still early days. But it is 70 percent committed, with investments in 12 companies. The firm has exited one of those investments, of $20 million, generating cash of $67 million and stock of $23 million, for a total value of $90 million, or 4.5x invested capital. Its investments are performing “at or above expectations,” according to PSERS’s recommendation to invest in LLR Partners III LP. That evaluation was prepared in September by Charles Spiller, director of private markets and real estate.
Fund III will stick to LLR Partners’s strategy of investing between $10 million and $75 million in lower mid-market growth companies primarily located in the Mid-Atlantic region—a niche PSERS sees as underserved by native firms such as LLR Partners with large networks. Since 1999, non-resident firms provided 85 percent of the $38.6 billion in growth equity and buyout capital invested in the Mid-Atlantic.
“As a significant net importer of private equity, the Mid-Atlantic lacks a base of well capitalized, sophisticated regional funds focused on lower middle market, later-stage investment opportunities,” Spiller wrote in his proposal.
Sectors of interest for LLR Partners include business services, financial services, health care, consumer services, and information technology.
The pension manager also likes the fund because its six-person investment team—Mitchell Hollin, Seth Lehr, Scott Perricelli, Ira Lubert, David Reuter, and Howard Ross—has been together since 2000. The partners are also making significant capital commitments to the fund.
Officials at PSERS and LLR Partners declined to comment.