- Hires five investing pros from Veronis Suhler Stevenson
- Plans to make non-control deals in U.S. and Europe
- First non-buyout strategy for Cleveland-based firm
The Cleveland-based shop is planning to launch a new fund family to focus on non-control, junior capital investments in fairly small companies, primarily in the United States but also in Europe, firm spokesman Graham Hearns told Buyouts. The Riverside Strategic Capital Fund would be the first for the firm not to concentrate on control deals.
“We think the fund will meet a clear need to provide capital to companies at the smaller end of the middle market that face an increasingly difficult lending environment,” Hearns said. Since the financial crisis of 2007-2008, commercial banks have pulled back from leveraged lending, citing the credit risks of leveraged companies and resistance from regulators. This has opened the market to non-bank lenders.
The new Riverside fund will seek deals in generally the same part of the market as its other funds, growth-stage companies with less than $250 million of enterprise value and $1 million to $25 million of EBITDA, in a variety of industry sectors, Hearns said. The fund should not be viewed exclusively as a mezzanine fund, he said. It also will invest through warrants and PIK-type instruments, and potentially through other forms of finance as well.
To speed its entry into the new field, Riverside has hired the five-member structured capital team from Veronis Suhler Stevenson, a New York-based fund management company that invests in both private equity and debt capital.
Those investing pros—George Cole, Hal Greenberg, Michael Kessler, Jeffrey Gordon and Jay Reynolds—are already on board at Riverside and will work out of the firm’s New York office, Hearns said. He declined to comment on the timing or size of the planned fund, saying it was premature.
As for Veronis Suhler Stevenson, the departure of the executives is unlikely to damage the firm, which still has 25 other investing pros, said a person familiar with the matter who asked not to be identified. The firm is headed by Jeffrey Stevenson, who is managing director of all of its funds. The executives who departed supported VSS Structured Capital II, which closed oversubscribed with $312 million in 2009. That fund is now 93 percent invested.
News of the personnel moves was reported previously by Fortune magazine. Cole sued his former employer in August seeking a severance package after the firm allegedly fired him for refusing to sign an employment agreement that would have limited his options after leaving the firm, as Buyouts reported at the time.
Riverside currently has four fund strategies—its flagship Riverside Capital Appreciation Fund VI LP, targeting companies of $5 million to $25 million of EBITDA that launched in 2012 and is within $20 million of its $1.5 billion hard cap, according to a regulatory filing in July; a micro-cap fund for control deals in companies smaller than $5 million; and funds targeting Europe and Asia.
In launching a credit fund, Riverside joins a number of other buyout shops that have entered, or expanded, in the space since the credit crisis. Cerberus Capital Management LP was reported in March to be seeking up to $1.5 billion for a mid-market leveraged lending fund, according to Bloomberg News. Apollo Global Management LLC acquired credit investor Stone Tower Capital LLC in December 2011, making capital markets its biggest business segment by assets. The Blackstone Group LP and Kohlberg Kravis Roberts & Co, among others, also have credit investing businesses.
Especially for publicly-traded private equity firms, the relatively steady cashflows of credit can smooth out earnings for shareholders, in contrast to the notoriously lumpy returns from buyouts. But for Riverside, whose only investors are those backing its funds, such considerations don’t apply, Hearns said. “Now we’ll be able to help entrepreneurs that don’t want to give up control, as well as those that do.”
CORRECTION: The executives who departed Veronis Suhler Stevenson worked on VSS Structured Capital II within the firm’s integrated investment platform. A version of this story posted on Sept. 23 may have given the incorrect impression that they constituted a separate business unit within the firm.