SF Equity Partners plans second fund in ’09

San Francisco Equity Partners, a mezzanine and growth stage investor, will likely try to raise a second fund in the range of $200 million to $300 million next year, firm founder Scott Potter tells PE Week.

Potter founded SF Equity Partners in 2005, spinning it out of London-based LMS Capital, a firm which remains one of SF Equity’s primary limited partners. Potter originally raised $80 million for his firm’s first fund, but later expanded it to $100 million by taking on another, undisclosed, LP in October 2007. SF Equity is likely to look for additional limited partners for its next fund, which Potter says will be “about a couple of hundred million dollars.”

The firm has yet to have a liquidity event from the six companies it has backed, but the additional funding it received in October valued SF Equity’s portfolio at a premium equivalent to a 20% IRR since its inception, Potter says.

Plans for the new fund are not yet solidified, but Potter says the firm plans to supplement the team of himself and Partner Cameron Steele by adding a third partner. He may also consider leveraging the partners’ time by adding a level of associates.

SF Equity makes minority investments in information technology and consumer-oriented companies with annual revenue between $10 million and $40 million, preferring to be a company’s first institutional investor.

“We definitely won’t change the strategy,” Potter says. “It allows us to be collaborative with the public equity players around us. We get a lot of referrals from private equity firms that can’t figure out how to put $30 million or $40 million to work, and we don’t want to lose that.”

Potter’s business has perked up since the credit crunch has made debt financing more expensive for growth stage companies, he says.

“The businesses we get involved with typically could finance their growth with debt leveraged on EBITDA, that’s not as available for them as it used to be, or it’s a lot more expensive,” Potter notes. “People aren’t quite as aggressive as they used to be, but they’re still sniffing around and looking for growth stories.”

One such growth story might be SF Equity’s most recent investment, a $14 million infusion in Tel-Aviv-based Yes To Inc., which makes premium beauty products designed for mass consumption. “You can bring affordable luxury to consumers that are probably not looking to buy another house or get a BMW,” says Potter. “It’s Starbucks vs. Folgers, and we’ve had a lot of luck with that model.”

The investment by SF Equity will help Yes To market its products to a wider audience, build sales channels beyond Walgreens and Duane Reade and relocate its headquarters to San Francisco. “The thing is growing like an absolute rocket ship,” Potter says. “Revenues will be up 100 percent.”

Other SF Equity portfolio companies include Madison, Wis.-based online art dealer The Guild, Los Angeles-based online premium destination travel company Luxury Link, San Francisco-based all-natural cleaning supply company Method Products and San Francisco-based Linux service provider Penguin Computing.