Spell Capital Sets Sights On Fund IV

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, a source familiar with the effort told Buyouts.

The firm started raising the fund in March, and expects to hold a first close of around $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, 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 revenues of at least $10 million and EBITDA of at least $2 million. The firm also prefers to invest in companies whose management teams have worked together for a while.

A $150 million would mark a significant step up in fund size for the firm, which closed its third fund at $57 million in 2006. Prior to its first fund, a $25 million pool 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 it sold 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. The buyer was RLJ Equity Partners. Spell Capital, which had acquired the company 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.

The firm, which seven investment professionals, was founded by William Spell. From 1981 to 1988 Spell was vice president and director of corporate finance at John G. Kinnard & Co., a regional banking firm located in Minneapolis.