Tale Of Two Texas Turnaround Funds

Firm 1: Prophet Equity

Fund: Prophet Equity I LP

Target: $250 million

Amount Raised: $250 million

Firm 2: Insight Equity

Funds: Insight Equity II LP, Insight Equity Mezzanine I LP

Targets: $500 million, $250 million

Amounts Raised: $435 million, $90 million

When they launched fundraising in the summer of 2008, Prophet Equity and Insight Equity could not have predicted the market disaster and subsequent LP-GP power shift that would occur. But one of the two Dallas-based turnaround investors met its target, while the other fell well short.

Last month Prophet Equity closed its oversubscribed debut fund at its hard cap with $250 million in commitments and a $25 million general partner commitment. The firm was founded by Ross Gatlin, who left Insight Equity in 2007 in part because his former employer was planning a significant increase in fund size for its second vehicle. Prophet Equity plans to maintain a fund size of $250 million for future vehicles, a promise that limited partners were attracted to, Gatlin said. LPs also like Prophet Equity I LP‘s significant GP commitment, and the ability for the firm to double the amount to $50 million. Prophet Equity also distributes carried interest to every member of its team.

“Anybody who said they had a problem with our terms was probably a little bit disingenuous,” Gatlin said. “It would not be the reason they didn’t not invest with us; I made sure to remove that as an issue from the outset.” In addition to LP-friendly terms, reaching out to international investors and building momentum through rolling closes were integral to the fund meeting its target, he said.

Insight Equity, led by CEO Ted Beneski and COO Victor Vescovo, also closed its new turnaround fund, but below its initial target. Last week the firm announced the close of its Insight Equity II LP, with $435 million in commitments, short of its initial target of $500 million. The firm also raised $90 million for a captive mezzanine fund called Insight Equity Mezzanine I LP, which had an initial target of $250 million. The new turnaround fund was larger than Insight Equity’s first fund, which had $300 million in commitments.

In addition to a larger target and new mezzanine strategy, Fund II has a performance-base carried interest. The firm takes a 30 percent carried interest rate on deals with returns greater than 4.5x, 25 percent on returns between 2.5x and 4.5x and 20 percent on deals with returns below 2.5x.