Stone Arch Approaches $200M Target On Midwest Fund

Firm: Stone Arch Capital

Fund: Stone Arch Capital II

Target: $200 million

Amount Raised: $170 million

Stone Arch Capital LLC expects to hold a final close on its second fund by the end of the year to continue investing in relatively small companies based in the Midwest.

Peter Grant

, a partner with the Minneapolis, Minn.-based shop, told Buyouts the firm has received capital commitments “just shy” of $170 million for Fund II. He’s optimistic the fund will close at its $200 million target before 2008 draws to a close, but did offer the caveat that market conditions are of concern.

“We’re hopeful right now, but we also recognize it’s tough out there for everyone,” Grant said. “We got a little lucky with the timing of our first close [at $160 million in June], which was just before things got really bad.”

Stone Arch Capital invests $10 million to $25 million to acquire companies with enterprise values of between $20 million and $100 million. The firm will also consider add-on acquisitions or product extensions. Sectors of interest include manufacturing and service industries, while the firm avoids real estate, technology and commodities-related businesses. It seeks companies generating annual EBITDA of more than $5 million and that enjoy operating margins of 10 percent or higher.

According to Grant, deal flow is holding up well in the wake of the turmoil in the public markets, but he echoed the lament of most buyout pros that equity contributions are going up and leverage is hard to come by. “Things are still getting done but financing raises questions,” Grant said. “What we’ve seen since liquidity tightened up is that relationships [with lenders] have become critical. That’s really what is driving the structure of deals these days.”

Stone Arch Capital I, the firm’s vintage 2005 debut fund, closed with $100 million in capital commitments in June 2006.

Portfolio companies include Wholesale Produce Supply Co., a fruit and vegetable distributor based in Minneapolis, Minn.; Mitchell’s Oil Field Service Inc., an oil industry services provider headquartered in Sidney, Mont.; and Alco Manufacturing Corp., an Elyria, Ohio maker of hydraulic hose fittings.

The firm’s most recent transaction was the sale of its equity interest in Norwesco Inc., a polyethylene storage tank maker, on Sept. 30. Exact financial terms of the deal weren’t disclosed. Stone Arch Capital originally invested in Norwesco in 2005 through a partnership with company management and business development company Allied Capital Corp. The company was purchased from fellow Minneapolis, Minn.-based buyout shop Norwest Equity Partners for $160 million, according to published reports at the time.

Stone Arch Capital sold its Norwesco stake to Olympus Partners, a Stamford, Conn., middle-market firm. In its press release, Olympus Partners said it invested about $100 million of equity capital in the purchase of Norwesco. Allied Capital said it realized a gain of $86 million on the Norwesco sale in its statement disclosing the deal. Allied Capital was also repaid about $65 million in subordinated debt outstanding to Norwesco at the closing.