Times may be tough, but Institutional investors continue to search for new firms to replenish their alternative asset investment portfolios.
U.S.-based emerging managers—loosely defined as buyout, distressed and growth equity firms raising their first or second fund—raised approximately $7 billion in the first half of 2010, or more than a fourth (25.5 percent) of the $27.4 billion raised by all buyout shops. Last year, emerging managers raised $10.7 billion, or 17 percent of the $61.3 billion raised in all of 2009, according to Thomson Reuters data. Below are six firms, listed from oldest to youngest, considered to be among the best of the next generation, based on interviews with limited partners and placement agents.
Harren Equity Partners
Strategy: Mid-market buyouts with an operational focus. Typically invests in companies with $20 million to $150 million in revenue in energy services, aerospace and defense, automotive, business services, and building products and services, among other industries.
Top Executives: Founder Thomas Carver, a former partner at H.I.G. Capital; Partner Lee Monahan was an associate at H.I.G. Capital. The firm has 11 investment professionals.
Fundraising History: Currently investing from a $200 million Fund II. Raised $35 million for first fund in 2000.
Buzz: Virginia shop with blue-collar ethos takes operational approach to companies found in obscure locations; first fund generates 4x invested capital.
Even teams with a track record at respected buyout shops can have a difficult time fundraising. Thomas Carver admitted that he was naïve in thinking
It took a stellar performance with that humble fund for Harren Equity to prove itself: The fund, which is fully realized, has generated more than 4x investors’ capital on a gross basis. “We were able to generate similar returns to those generated while at H.I.G. but on our own platform,” Carver said.
As a result, the Charlottesville, Va.-based shop was able to raise $200 million for Fund II in 2007 from notable funds of funds managers such as
Limited partners also liked the fact that executives fund about 10 percent of their funds with their own money, and are able to sniff out deals in markets ignored by typical New York-based firms. For example, Virginia Drilling Co., a drilling company Harren Equity bought with its first fund that serves the mining industry, is based in Vansant, Va., a town with a population of 989 based on the 2000 Census. Carver and Partner Lee Monahan are more apt to attend management meetings in jeans and a golf shirt than in a pin-stripe suit. “They tend to have more of a ‘roll up your sleeves’ approach and less of a Wall Street-financial approach,” said Frank Angella, general partner at Grove Street.
Strategy: Invests between $10 million and $30 million in companies based in the Mountain West and West Coast regions
Top Executives: Fraser Bullock, veteran of Bain & Co. and Bain Capital who was CEO of the Salt Lake Organizing Committee for the 2002 Winter Olympics alongside fellow Bain alumnus and presidential candidate Mitt Romney
Fundraising History: Investing from $400 million second fund, closed in 2008.
Bullock founded Sorenson Capital with Ron Mika, who in 2003 was a managing director at Bain Capital looking to get back into smaller buyouts. The firm has 18 investment professionals and seven operating partners who are typically former executives from the business consulting, manufacturing and technology sectors.
Sorenson Capital bought 16 companies with its $250 million debut fund, which garnered support from James Lee Sorenson, an entrepreneur in Utah, as well as Grove Street Advisors,
The firm is currently investing from its second fund, a $400 million pool of capital it closed in 2008.
San Francisco, Calif.
Strategy: Buyouts and growth equity investments in technology-enabled services, software, e-commerce, Internet marketing, wireless technology, for-profit education, financial services.
Top Executives: Managing Partners Gavin Turner, a former vice president responsible for West Coast media and communications technology investments at Summit Partners, and Jason Payne, who also began his career at Summit and helped manage one of its portfolio companies, American Dental Partners.
Fundraising History: Raised $33 million for first fund in 2005; raised $110 million in 2008.
Buzz: Firm replicates cold-calling program pioneered by Summit Partners, earned 3x its invested capital on first exit.
Gavin Turner and Jason Payne, managing partners of
The firm raised $33 million for its inaugural fund in 2005, and followed that up with a $110 million fund in 2008. Mainsail Partners has sought to replicate Summit Partners’s cold-calling program, in which four associates are charged with identifying attractive companies and initiating relationships with their management that might someday lead to a deal. Mainsail Partners has seven portfolio companies, including eSecuritel Holdings, a company that provides insurance for cell phones and other wireless devices.
Cash Management Solutions has so far been the firm’s only exit, but it was a good one: In 2008 Mainsail Partners sold the company, making 3x its invested capital.
Bertram Capital Management LLC
San Mateo, Calif.
Strategy: Mid-market buyouts and growth financing of companies generating $3 million to $15 million of EBITDA in the business services, health care, manufacturing, aerospace and clean technology industries.
Top Executives: Managing Directors Jeff Drazan, a long-time venture capitalist who co-founded Sierra Ventures, and his brother Ken Drazan, M.D., a former liver transplant surgeon who oversees health care investments.
Fundraising History: Raised $350 million in 2006; at deadline was expecting to close Fund II, which had already attracted more than $500 million in commitments.
Buzz: Successful veteran venture capitalist tries his hand at buyouts, attracts big name investors including CalPERS and Boeing Co.
Bertram Capital owns four companies, including Author Solutions, a publishing business whose cash flow Drazan said the firm has increased to $20 million from $1 million in three years; and Power Distribution Inc., a company that makes energy management equipment for data centers and alternative energy facilities, whose revenues Drazan said have increased to $120 million from $28 million in three years. At deadline, the firm was closing in on an acquisition of Supra, an apparel company. The firm has yet to exit any companies, though through the end of 2009, its first fund had generated an IRR of 18.4 percent and an investment multiple of 1.3x for CalPERS.
The firm is wrapping up fundraising for its sophomore effort, already having surpassed its target of $500 million. New investors include
Strategy: Mid-market buyouts in business services, education, health care, industrial technology and services, and specialty foods.
Top Executives: Managing Partners Robert Martin and David Kessenich.
Fundraising History: Raised $265 million in 2007.
Buzz: KRG Capital spin-out goes back to lower mid-market roots.
In 2006, Robert Martin and David Kessenich founded
The result was Excellere, which invests in companies generating EBITDA of between $4 million and $15 million. Sectors of interest include health care, which accounted for more than half of Martin and Kessenich’s deal-making at KRG Capital, as well as business services, education, and industrial technology and services. The firm has made five investments. Most recently, in December 2009, it bought MTS Medication Technologies Inc., a St. Petersburg, Fla.-based company that makes drug packaging equipment.
Raising a first-time fund had its challenges at a time when huge firms such as
The firm was able to raise $265 million, with blue-chip investors such as the
High Road Capital
Strategy: Lower mid-market buyouts targeting distribution services and manufacturing companies with EBITDA of at least $3 million.
Top Executive: Bob Fitzsimmons, founder, formerly a managing partner at Riverside Co.
Fundraising History: Raised $150 million in 2007.
Buzz: Respected Riverside Co. veteran launches his own firm
New York-based Riverside Co., with $3 billion under management, has built a unique niche for itself as a global enterprise targeting lower mid-market firms. So when one of its managing partners, Bob Fitzsimmons, became the first and only executive of the 22-year-old shop to start his own firm, investors listened. In 12 years at Riverside, deals that Fitzsimmons led generated, in the aggregate, 4x invested capital. Fitzsimmons also poached two junior investment pros from Riverside, vice presidents Jeff Goodrich and Bill Connell, who are partners at High Road. Riverside even promoted the effort. “At the last investors’ conference before I was leaving Riverside, [co-CEO] Bela Szigethy actually stepped in front of LPs, and said, ‘These guys are spinning out and if they call, you should answer.'”
With his record and Riverside’s endorsement, Fitzsimmons raised $150 million for High Road’s debut fund in 2007 from respected backers such as funds-of-funds manager
Now Fitzsimmons is replicating the lower mid-market strategy Riverside helped pioneer. The firm, with eight investment professionals, has made five acquisitions. Its portfolio includes Advanced Sleep Medicine Services, a company that provides sleep disorder diagnostic services, and All Current Electrical Sales, a wholesale re-seller of circuit breakers, conduit fittings and other electrical parts and components used in the energy industry.