Riverside Partners Hooks New LPs

Riverside Partners has focused on the middle market long before it was considered cool. Not to be confused with its smaller market peer The Riverside Co., the firm credits its dedication to the mid-market for helping to lure new investors to its latest fund, which closed in mid-May with $225 million in commitments. The vehicle, Riverside Fund III, has already invested $40 million.

The fund exceeded the firm’s initial target of $175 million. Riverside closed on about $100 million last November and corralled another $50 million this past February. It held a final close on May 5.

The fund size represents a significant jump in capital versus the firm’s previous investment vehicles, as Fund III nearly doubled the combined capital raised in the firm’s first two funds. Riverside’s debut, Riverside Partners, closed on $46 million in 1989 and Riverside Partners II closed in 1999 with $68 million.

Limited partners in the fund include Abbott Capital Management, Hartford Investment Management, the Massachusetts Institute of Technology, TIFF and MN Services, which is investing on behalf of undisclosed clients. Other LPs include family offices, funds of funds, individual investors and university endowments.

The new fund has a much broader base of institutional investors, whereas the firm’s first two funds were backed by smaller groups that eventually decided to do away with their private equity allocations. Riverside managed to gather a new herd of LPs both through its use of San Francisco placement agent Probitas Funds Group and by informally using friends and advisors.

“From a strategic standpoint, we hoped that investors would like a differentiated fund in the middle market,” said Riverside General Partner David Belluck.

Riverside invests in healthcare and technology companies with revenues of between $10 million and $100 million that are usually founder or family-owned. The firm also has three special “operating partners” that are former lower middle-market CEOs, who help run its businesses. Riverside prefers that the founding seller remains with the portfolio company as a CEO or board member.

Belluck says that the buyout market is a tougher place to do business now and that this will remain one of the larger challenges for the new fund. “There’s a lot of capital out there and the private equity market has become a lot more efficient over time.” Belluck said. “It’s unusual to find an attractive business that’s not being represented in a competitive sell process.”

To gear up for this increasingly competitive environment, Riverside added Jon Lemelman, formerly of the private equity division of Fidelity Investments, as general partner to focus on sourcing deals through business owners. Lemelman came on board two years ago. The other general partners are Belluck and Brian Guthrie.

“Everyone has to be in the ballpark on valuation,” said Belluck, “but I think the founders we invest in want to stay involved and believe in the future of the company.”

The firm started investing Riverside Fund III in the last quarter of 2005. So far it has invested $40 million in three companies: National Display Systems, a Morgan Hill, Calif.-based provider of flat panel displays used for medical purposes; Quantum Medical Imaging, which develops x-ray systems for doctors and hospitals based in Ronkonkoma, N.Y. and Albany, N.Y.-based Sixnet, which makes industrial automation and connection devices. — M.S.