RCP Advisors Readies For Next Fund –

As if there weren’t enough good things happening in the buyout market, there’s more to be happy about if you are a repeat fund raiser. RCP Advisors, a fund of funds based in Chicago, is raising its third fund, which is expected to take in as much as $450 million.

The partners at the firm, which was founded in 2001, believe their key differentiating advantage is the team, which has had professional private equity investment, advisory and management experience. “We come from experience, having worked on deals with different buyouts funds around the country. In one way or another we were all involved in private equity transactions through our old jobs,” says Tom Danis, a managing principal with the firm.

Danis, now mainly responsible for ongoing relationship management of private equity fund managers, was a director of Aon’s Merger and Acquisition Group prior to founding RCP Advisors. The other founders hailed from Aon, Heller Financial Inc. and Marsh USA Inc.

While the founders’ backgrounds were a plus, the group knew they needed more to become credible as an emerging fund of funds firm, so they brought on an advisory board to guide them through the early stages of fundraising. People on the board included Philip Canfield, a managing director from GTCR Golder Rauner; Thomas Flanigan, a managing director from Deloitte & Touche; and Samuel Hamacher, president of Harbour Group.

The firm raised its first fund in 2002. The first close came in July of that year with $40 million. “It was a stepping stone to get the institutions to look at us. We had about 20 individuals capitalize the firm. It took us an entire year to raise $55 million,” says Danis. “It was twice as hard to raise the last $15 million. Getting those first institutions to come in took work. But when the institutions started digging into us, they were surprised how good our market intelligence was. We also know all the other parties in these transactions because of our backgrounds. When investment consultants saw this, and the fact that we can get into solid funds, they felt good about investing the capital.”

RCP Advisors raised that last $15 million from private pension funds, corporations and private companies. Fund I wound up investing in 13 underlying managers, including HIG, Endeavor and the Jordan Cos. “We were fortunate to get into those funds,” says Danis.

While no one would say fund raising is ever easy, it certainly went much smoother RCP’s second time around. In January 2004, the firm started to raise its second fund. By December 2004, the firm had garnered $140 million. “The LP base really began to improve this time around. We got 10 endowments, 10 foundations and several corporate pensions as clients as well as a decent following of single offices-they have been the most supportive,” says Danis. “Many of the single offices were directly invested in buyout funds, but when they saw our value proposition they decided to invest with us.”

Fund II is almost fully deployed. It’s just waiting on some final buyout shops to close funds.

Isn’t The Middle Market

Crowded Enough?

RCP focuses on the small-to-middle market segment of the U.S. buyouts market. The firm believes that this sector offers some of the most compelling opportunities.

The firm’s sweet spot is private equity firms investing in companies with enterprise values of between $25 million and $250 million. RCP will also entertain funds investing anywhere from $10 million to $500 million.

It certainly seems like a crowded area to be playing in, but Danis insists it’s better than the alternatives. “There’s no doubt this is a frothy market from every perspective. But focus on the small middle market still pales by comparsion. Our funds are still finding acquisitions at multiples of about 6.5x. We are very comfortable with that,” Danis said.

That’s not to say that Danis puts no merit in the barbell strategy. “Mega funds like The Blackstone Group are going to continue to outperform, but when you get to the smaller funds you are going to find a lot of inexperienced partners. We already allocate 20% to emerging managers,” says Danis.

RCP has three rules when investing in an emerging manager. First, the firm will only invest in an emerging manager if the new manager has worked with his team before. “That takes the reorganization risk out of the equation,” says Danis. Second, the firm has to have some type of track record. “They have to have been part of another deal team, or worked on sponsorless deals or something,” says Danis. And last but not least, they have to something unique. “They need to be doing something or have something that we can’t find in an existing manager,” says Danis.