Spell Capital sets sights on fourth fund

Spell Capital Partners, a Minneapolis-based firm that acquires small manufacturing companies, last month began raising its fourth fund with a target of $150 million, according to a source familiar with the effort.

The firm started raising the fund in March and expects to hold a first close of about $75 million in the late summer or early fall of 2010. The firm has no plans to retain a placement agent for the fund.

Founded in 1988 by William Spell, a veteran of the regional bank John G. Kinnard & Co., Spell Capital typically cuts equity checks of $3 million to $20 million to acquire profitable manufacturing businesses, then expand them through add-on acquisitions. Targets tend to generate revenue of at least $10 million and EBITDA of at least $2 million.

The firm prefers to invest in companies whose management teams have worked together for a while.

A $150 million fund would mark a significant step up for the firm, which closed its third fund at $57 million in 2006. Prior to its first fund, a $25 million pool that closed in 1998, Spell Capital made a number of one-off investments. Executives believe a larger fund will enable them to rely less on mezzanine financing and to buy six or seven portfolio companies, as opposed to the three or four portfolio companies its earlier funds could support.

Spell Capital’s most recent liquidity event came in December when RLJ Equity Partners bought an undisclosed stake in portfolio company LAI International Inc., a Westminster, Md.-based company that makes components used in aircraft engines, power generators and defense systems.

Spell Capital, which had acquired LAI International in 2005, wanted to generate some cash for its investors while also maintaining an interest that could grow in value as the company expands. RLJ Equity may eventually buy the remainder of Spell Capital’s stake.

Spell Capital’s most recent investment also came in December, when it bought Norshield Security Products, a Montgomery, Ala.-based company that makes doors that resist bullets and bomb blasts. —Bernard Vaughan