Of the $77.1 billion raised by U.S. buyout firms in the first half, an estimated $13.5 billion has been secured by some 49 emerging managers. These include Peak Rock Capital, which has taken in about $600 million for a debut fund that had a target of $400 million, according to Dow Jones; and Pamlico Capital, which has secured at least $354.5 million toward a $600 million target on its first fundraise since spinning out of parent bank Wells Fargo. The influx of fresh faces into the industry means that limited partners will have no shortage of chances to take a flyer on what could be the next Kohlberg Kravis Roberts & Co.
Winona Capital is one of the relative unknowns making its mark on the fundraising trail. The Chicago-based lower mid-market shop held a first close of just under $123 million in April toward its target of $175 million and hard cap of $200 million on its second fund, earmarked for buyouts and growth equity investments in consumer products and service and retail. The Laird Norton Company, a seventh-generation family business that supplied the majority of the $119 million debut fund, has returned for Fund II, likely to have a far more diversified investor base.
Managing Director Laird Koldyke is formerly a partner and co-head of the consumer investment practice at Chicago buyout shop Frontenac Company and one of more than 400 family shareholders of Laird Norton, where until 2012 he was a director. Koldyke said a number of additional investors have said they’re good for commitments to the partnership. The firm hopes to wrap up the fund in early fall, about a year after launch.
In the first close Winona Capital has attracted mainly single-family and multi-family offices and individuals, including most of its debut fund investors, said Koldyke. In its push to the finish line the firm is looking to corral university endowments, funds of funds and other institutional investors. It is getting help in that effort from placement agents Atlas Placement Advisors and Mira Capital Advisors.
And the attraction for investors? For starters Winona Capital’s roughly eight-person investment team plays in the small end of the buyout market. Compared with the middle market, competition for fast-growing companies is less intense, according to the firm, and many founders of small companies welcome capital and advice. Winona Capital will buy or invest growth equity in companies generating as little as $1 million in EBITDA; its sweet spot covers companies with revenues of $10 million to $100 million.
At the same time, the firm’s debut fund shows promise. Winona Capital has sold two of its first nine portfolio companies, and as of year-end was posting a healthy double-digit net IRR on both realized and unrealized deals, including a $3.6 million co-investment on which the firm collects fees and carried interest, according to marketing materials provided to Buyouts. In the bigger of its two exits the firm multiplied the value of its March 2009 $10.8 million investment in men’s apparel maker Peter Millar by 6.6x. In its other exit the firm more than doubled the size of its June 2008 $11.2 million investment in Dragon Alliance, a maker of ski goggles and other sports accessories, according to the materials.
Of its active portfolio companies, Koldyke pointed to Petsense of Scottsdale, Arizona, as holding particularly promise. The firm invested $8 million in the retailer of pet supplies and grooming services in July 2011; the firm was carrying that investment at an appreciably higher valuation as of year-end. Koldyke said the deal came after the firm conducted years of research into the pet products market, searching for underserved markets — in this case medium-sized towns not large enough to attract big-box retailers like PetSmart. President and CEO Bob Angstead met with representatives of Winona Capital almost two years before eventually doing a deal. At the time the company had just under 30 stores; today the company is close to opening its 100th. “We’ve really been able to encourage and be a part of robust growth,” said Koldyke.
Prospective investors will have to decide whether they see similar growth potential in Winona Capital’s future. “The fundraising climate is not very good, but I think good stories and good teams are able to raise capital,” said Koldyke. “I’m proud that we’re in that category.”