Summit Partners held the final close on its Summit Subordinated Debt Fund III LP, surpassing its $400 million target with a total haul of $465 million.
“Our real intention with these [subordinated debt] funds is solely for investing alongside our equity funds,” Summit Managing Partner Martin Mannion said. “We have the capability to invest elsewhere, but our first two funds have not done a deal without our equity funds, and we don’t anticipate this fund will either.”
The firm primarily approached existing Summit limited partners to invest in this vehicle, and as a result over 95% of the new fund’s investors have participated in previous Summit funds. Without the aid of a placement agent, the firm targeted public and private pension funds, university endowments, financial institutions and corporations for investments, and Summit would identify only the Virginia Retirement System among those investing in the fund.
This is Summit’s third vehicle targeting subordinated debt, following the 1994-vintage, $141 million Subordinated Debt Fund I, and the $330 million Subordinated Debt Fund II, raised in 1998.
In the upper tier of the financing arena, the mezzanine market has been pushed aside, as high yield has re-emerged in the past year or so. However, in the smaller deals, where Summit traditionally puts its money, the high-yield market has not had nearly as much of an impact. “In companies where there’s north of $35 million in EBITDA, high yield has cut into that market dramatically,” Mannion said. “Sub-$35 million [EBITDA], though, where there is at best three-and-a-half to four times total leverage, there usually needs to be a mezzanine tranche to get the financing completed.”
The firm said it will invest in transactions as low as $2 million and as high as $250 million, and, when investing equity, Summit will straddle the line between LBOs and later-stage venture capital. In the past, the firm has provided financing for B&W Loudspeakers, E-TEK Dynamics, iPayment, Keystone RV Co., Lincare, Network Associates/McAfee Associates, OPNET Technologies, OptionsXpress and others.
“The [subordinated debt funds] really makes us a one-stop shop. We were initially driven to raise our first [sub debt] fund because we found ourselves doing transactions with some rapidly growing businesses and they didn’t want to take on any bank debt, so this really made sense for us,” Mannion said.
Summit raised the fund in just under three months, and, going forward, the firm expects to fully deploy the capital in the next four to five years.
Firm: Summit Partners
Web Site: www.summitpartners.com
Capital Under Mgmt.: $5.5B
Fund: Summit Subordinated Debt Fund III LP