RCP Advisors keeps Chugging Along –

RCP Advisors LLC, a fund-of-funds based in Chicago, is continuing to forge ahead. The firm, in the midst of raising its third fund, a $175 million targeted vehicle, recently announced that it has made a commitment to Sentinel Capital Partners latest vehicle, investing alongside AlpInvest, Abbott Capital Management and Pacific Corporate Group.

Sentinels new $319 million fund is right up RCPs investment alley. The fund of funds focuses on small- and middle-market LBO shops, which the RCP principals believe to be a key differentiating advantage for them. Additionally, the RCP pros credit their backgrounds in lending, advisory and investing as an advantage. We come from experience, having worked on a number of deals with many different funds. In one way or another, we were involved in almost every aspect of a private equity transaction through our old jobs says Tom Danis, a managing principal with the firm.

Danis, who leads the investment sourcing and ongoing relationship management function of the firm, was previously a director of Aons Mergers and Acquisitions Group prior to co-founding RCP. The other founders, meanwhile, came to RCP after stints at Marsh Inc. and Heller Financial.

In addition to their own experience, RCP also bolstered its roster with a number of industry pros. Their advisory board, which assists in all aspects of RCPs strategy, includes Philip Canfield, a managing director of GTCR Golder Rauner, Thomas Flanigan from Deloite and Touche, and Samuel Hamacher, president of Harbour Group.

From Fundraising Adolescence to Adulthood

The firm held its first close on its inaugural effort in July 2002 with $40 million. It was a stepping stone from which we hoped the institutional investors would then begin to consider us. It took an entire year to raise the next $55 million, at which point we closed the fund, says Danis. It really was twice as hard to raise the final $55 million, as the institutional investors and their consultants took their time in order to see how our portfolio would develop.

Although their first investors were primarily high net worth individuals consisting of friends and family, Fund Is LPs included a number of corporate pensions, endowments and foundations by its final closing in summer of 03. Fund I wound up with 13 underlying managers, including the likes of HIG, Endeavor and the Jordan Cos.

The fundraising process went much smoother the second time around. By December of 2004, the firm had garnered over $140 million after about 12 months in the market. The LP base really became more institutional in nature this time around with over 10 endowments, foundations and pensions. Additionally, the single family office community has been extremely supportive, says Danis. Many of our clients from that constituency were previously direct investors in the LBO arena, but decided our focus and value proposition in the small- and middle-market LBO space was worthy of their outsourcing that aspect of their LBO program to us.

Fund II is almost fully committed and is just waiting on a couple of funds to hold their final closes.

Just as RCP knows how difficult fundraising can be, they know times can be just as difficult when the pros switch hats from fundraiser to investor. But its this diligence that will eventually make fundraising easier for RCP the next time around.

Danis said his firm does more than just check a private equity firms list of references. Its calling the CEO that was fired that they did not predictably offer up as a reference to see what they have to say. We go into the marketplace and through our network of lenders, i-bankers and attorneys that have worked with the firm and just try to find out all the extra market intelligence we can. Its not a profound tactic, but most people dont have the market specific network to get all the information that we obtain says Danis.

Danis also notes that while one firm might have a great track record, that doesnt necessarily guarantee a commitment from RCP. The firms sector may have just been in favor, and the GP was in the right place at the right time. Its about really sorting through all the information, Danis says.

RCP favors managers targeting acquisitions of companies with enterprise values of between $25 million and $250 million, but will entertain funds investing anywhere from $10 million and $500 million.

It certainly seems like a crowded area to be playing in, but Danis insists it remains attractive, especially by comparison. There is no doubt we are in a pretty frothy market from many perspectives. However, the level of efficiency in our target market versus others still pales by comparison. Our funds are still acquiring companies in the 5.5x to 6.5x EBITDA range and were comfortable with that given their value creation strategies, says Danis.

RCP allocates approximately 20% to small emerging managers, but has three primary rules before giving anyone real consideration: First, Danis said, the partners must have worked together previously whether as a fundless sponsor or as a deal team at another PE firm. Second, the partners must have an attributable and relevant track record. Third, they must bring a unique complement to RCPs portfolio in terms of style, focus and strategy that the firm cant otherwise find in an established player.