Sterling Group scores new LPs

The Sterling Group sprinted though the arid fund-raising market to raise $820 million and a host of new limited partners for its third fund, leaving in the dust the fund’s $600 million target and a slew of struggling fund-raisers in the market.

Sterling Group Partners III was raised in about 10 months and is nearly twice the size of its predecessor, the $470 million Sterling Group Partners II, which closed in 2005. C. Kevin Garland, a partner at the Houston-based firm, says that the larger fund will be helpful in the current climate, where the short supply of leverage makes it necessary for firms to increase the size of their equity checks.

More than 10 institutional limited partners are new to fund III. New investors include Allianz Capital Partners Inc., the Canada Pension Plan Investment Board, the New York State Teachers’ Retirement System and the State of Wisconsin Investment Board. Other LPs in the fund include Constitution Capital Partners, the Credit Suisse Customized Fund Investment Group, DuPont Capital Management, Hancock Capital Management and RCP Advisors.

“That is a difficult thing to do in this market,” Garland says, of scoring more than 10 new LPs. “It’s tough enough getting re-ups from your existing investors, much less have people take on new relationships.”

No investments have been made through fund III as of press time. Fund II, which has made eight platform investments—six of which are still active portfolio companies of The Sterling Group—may be used to make one more platform investment, Garland says.

Garland says that equity requirements for his firm’s deals typically range from $60 million to $120 million, and in today’s market they’ll likely be at the higher end. The Sterling Group invests in manufacturing, industrial service and distribution companies with enterprise values between $100 million and $500 million.

Founded in 1982, The Sterling Group operated without a dedicated fund for its first 18 years. Realized investments from fund I, raised in 2001, and fund II, raised four years later, have returned to investors an aggregate of 2.9x invested capital with an IRR of 47.7%, according to the firm. —Ari Nathanson