Riverside Co. Closes $250M Micro-Cap Fund

Firm: Riverside Company

Fund: Riverside Micro-Cap Fund I

Target: $150 million

Amount raised: $250 million

Placement agent: none

Legal counsel: Jones Day

As much of the private equity world raises larger and larger funds and contemplates buying companies that were considered out of the private equity orbit in normal times, it is a rare thing for an established private equity firm to take a serious focus on smaller companies. But The Riverside Company says that there are big returns to be made from going after smaller companies, and to back that assertion up, the Cleveland-based firm closed on its first micro-cap fund with $250 million.

With fund raising commencing last fall, the fund, Riverside Micro-Cap Fund I, initially had a target of $150 million and a cap of $200 million, but the firm bumped up the cap to $250 million early this year. The micro-cap fund held a first close last August with $2 million.

Riverside went back to the well and only took institutional money from existing limited partners. LPs in the micro-cap fund include AlpInvest Partners, the Credit Suisse and Ohio Public Employee Retirement System’s Ohio-Midwest Fund, Meketa Investment Group, Makena Capital Holdings, the State of Michigan Retirement Systems and RCP Advisors.

The fund invests in North American companies with revenues between $5 million and $25 million and EBITDA of $3 million or less. Riverside is normally focused on middle-market companies. Its last domestic buyout fund, 2003 Riverside Capital Appreciation Fund, closed on $750 million.

“There’s kind of a pretty well-worn path in private equity today that once private equity firms become established they want to do bigger and bigger deals,” says Stewart Kohl, Riverside’s Co-CEO. “We want to do more and more smaller deals.”

“It is a bit contrarian and maybe even heretical what we’re doing but we think that the reward for this is the potentially higher returns that we think that we can generate,” says Kohl. He explains that in the course of the firm’s normal deal flow, Riverside came across lots of high-quality small companies that held a lot of value but were not a fit for the firm’s existing larger funds. He says that the micro-cap market is dominated largely by small, boutique-like firms that don’t have the institutional backing that Riverside does. “There are a lot more opportunities in that space that can be done by private equity firms.”

The firm plans to hold onto its micro-cap portfolio companies for between seven and 10 years and is aiming for earnings of more than $10 million at exit.

Riverside began investing the fund beginning last July. The micro-cap fund has eight portfolio companies and Riverside says it expects to announce its ninth micro-cap company very soon. So far the fund has invested in promotional product distributor Adventures in Advertising, mail order company ActivStyle, health and safety publisher American Safety & Health Institute, delivery service provider Express Courier, yellow pages directory publisher LocalTel, furniture software provider PROFITsystems, respiratory equipment and services provider RCS Management Corp. and wallpaper and fabric designer Thibaut.

The firm has a 14-person team overseeing the micro-cap program, which is led by Partner Loren Schlachet and Senior Operating Partner Ron Sansom.

The Riverside Company was founded in 1988 and has invested in deals with transaction values totaling $2.7 billion over 137 deals. It now manages 51 portfolio companies and has $1.6 billion in capital under management across eight funds. It is headquartered in Cleveland but has a total of 11 offices in the United States and Europe. — M.S.