Searchlight raises $3.4bn for Fund III to invest in down-cycle ‘it was built for’

Turnaround investor Searchlight Capital Partners wrapped up a third flagship buyout offering at $3.4 billion, founding partner Erol Uzumeri told Buyouts.

Searchlight Capital III finished well ahead of a $2.75 billion target. The fund is roughly 75 percent larger than its predecessor, closed in 2015 at more than $1.9 billion.

Fund III was backed by a mix of global limited partners. Disclosed investors include California State Teachers’ Retirement System, Florida Retirement System Trust Fund, New York State Common Retirement Fund, Pennsylvania Public School Employees’ Retirement System, Texas Municipal Retirement System and Washington State Investment Board.

The vehicle’s size owes mostly to re-ups from existing investors, Uzumeri said. Several LPs upsized commitments early on – allowing Fund III to raise most capital before the health crisis – and upsized them again when covid-19 spurred a downturn.

The idea, Uzumeri said, was to help Searchlight capitalize on a moment “it was built for.”

Searchlight was founded in 2010 by Uzumeri, formerly Ontario Teachers’ Pension Plan’s head of private equity, Oliver Haarmann, an ex-partner with KKR and Eric Zinterhofer, an ex-senior partner with Apollo Global Management. They aimed to create a firm that could invest flexibly, emphasizing distressed opportunities when times are tough, and switching to mostly private equity investing in periods of recovery and growth.

As part of this approach, Searchlight was set up to make control acquisitions of mid-market companies on a transatlantic basis, sourcing deal flow outside of auctions in North America and Europe. Complex and value opportunities would be sought in sectors familiar to the founding partners, such as communications, media and financial and business services.

The “genesis” of the strategy was the financial crisis, Uzumeri said. Because Searchlight was designed to do deals “in all investment climates,” he added, it was able to locate attractive opportunities over a 10-year bull run.

A pre-2020 focus was sectors exhibiting “a secular trend,” Uzumeri said. He cited broadband connectivity and infrastructure, where Searchlight found numerous businesses it could buy at reasonable prices and improve operationally. Examples include Electric Lightwave and GCI, both realized, and Mitel, an active investment.

By investing in sectors like broadband, Searchlight added assets to its portfolio that performed in both “up-markets and down-markets,” Uzumeri said. This proved of value with the onset of the pandemic.

Rapid deal pace

Searchlight is investing in its first down-cycle at a rapid clip. Fund III has already committed more than 30 percent of its capital, Uzumeri said, completing “all different types of transactions.” Its debut deal, announced late last year, was the recap of Survitec, a UK maker of safety systems for marine and defense applications.

Searchlight has since acquired Global Risk Partners, a UK insurance intermediary, and partnered in the acquisition of Univision, a US Hispanic media company. It also carved out the US Northwest telecom network assets of Frontier Communications in a $2 billion deal, creating Ziply Fiber.

In addition, Searchlight committed $425 million to refinance and grow Consolidated Communications, a US broadband communications provider; took private Opus, a Swedish vehicle inspection business; and led a $135 million financing of GetYourGuide, a German travel booking platform.

Searchlight expects to find more quality opportunities over “an elongated period of recovery” of 18 to 24 months, Uzumeri said. In this often opaque environment, he said a global team of 47 investment professionals are utilizing “a full tool kit” to analyze impacts “sector by sector, company by company.”

There will be no change in Searchlight’s strategy between Fund III and prior vehicles, Uzumeri said. With a deeper pool, it will back a few more companies and invest slightly more capital. The fund will typically deploy $100 million to $300 million per platform deal, relying on co-investors in the case of larger transactions.

Fund III is targeting a 20 percent to 30 percent IRR and 2x to 3x multiple on invested capital, according to 2019 report by Pennsylvania PSERS.

Operating from offices in New York, London and Toronto, Uzumeri, Haarmann and Zinterhofer oversee a partnership group of eleven. They include Ralf Ackermann, Tom Hendrick and Albert Shin, who manage the firm’s non-control strategy.

Other partners are Andrew Claerhout, François Dekker, Andrew Frey, Darren Glatt and James Redmayne. Claerhout joined Searchlight last year from Ontario Teachers’, while Redmayne came onboard this year from CVC Capital Partners.

Action item: See Searchlight Capital Partners’ ADV filings here.