With housing rebound, Charlesbank turns to constructing next fund

Year founded:1998, with a history dating to 1991

Investment strategy: Mid-market buyouts, frequently in out-of-favor sectors

Key executives: 25-member investing team; 20-member operations team

Office locations: Boston, New York

Assets under management: More than $2 billion

Select LPs: Regents of the University of California, Massachusetts Pension Reserves Investment Management Board, Harvard Management Company Inc, Los Angeles Fire and Police Pension System, University of Colorado Foundation

Fundraising status: Said to be preparing to launch marketing for $1.5 billion Fund VIII

Number of active portfolio companies: 19

Web address: http://www.charlesbank.com

At the time, executives pointed to Cedar Creek Inc, a Tulsa, Oklahoma-based distributor of wood products for the construction industry, as an example of the kind of portfolio company that would deliver long-term returns for investors. But the rebound of the housing market arrived more quickly than expected. And Charlesbank Capital, which has developed a track record of investing in sectors that are out of favor, appears to have turned its attention in other directions.

Indeed, life sciences and other healthcare-related investments have turned out to be an area of focus for Charlesbank Capital in recent years, along with automotive deals.

The firm’s final deal of last year, for example, was an add-on for its portfolio company United Road Services, a provider of vehicle transportation services that it acquired a year earlier. In December, the firm announced the purchase of the auto transport division of Waggoners Trucking, a car-hauler based in Billings, Montana, and Irving, Texas. Charlesbank Capital said the deal would provide a complementary customer base and operating synergies, including the use of United Road’s technology platform and call center to help fill trucks returning from deliveries with vehicles to carry in the other direction.

That transaction followed the acquisition last July of Trojan Battery Co of Santa Fe Springs, California, a family-owned maker of lead acid batteries used in golf carts, backup power supplies and recreational vehicles, among other applications. Earlier in 2013, Charlesbank Capital and Webster Capital acquired OneStopPlus Group. New York City-based OneStopPlus is a catalog retailer and online marketplace for plus-size consumers. In none of those cases were terms disclosed.

By contrast, the only housing-related deal that the firm has made since Cedar Creek was the purchase of DEI Holdings of Vista, California, a maker of electronic products including Polk Audio home theater systems. The firm took DEI Holdings private in June 2011 for about $305 million.

Recent Track Record

Through 2010, Charlesbank had returned around 2.5x its invested capital since spinning out of Harvard Management Co in 1998, as Buyouts reported that same year. The firm invests in a variety of industries, focusing on management-led buyouts and growth capital financings, typically investing $50 million to $150 million in companies with enterprise values of $100 million to $750 million.

As of March 31, 2013, Fund VII was less than halfway drawn, according to the Regents of the University of California, which committed $50 million to the pool. Returns from the fund have been minimal, as expected for a young fund, and the portfolio’s marks on its holdings appear to be close to the transaction prices of the deals. The California Regents calls Fund VII’s investment multiple and IRR“not meaningful,” as a footnote to its report explains, because the fund is “still in the process of making new investments and the performance of new and existing investments will not be determined for several years to come.”

By contrast, the 2005-vintage Fund VI, which is more than 90 percent drawn, is returning a 1.43x investment multiple and a 10.2 percent IRR as of March 31, 2013, according to the California Regents. In an analysis of 58 2005-vintage domestic buyout and turnaround funds in October from our fund performance database, Buyouts found that the bottom quartile was returning 1.2x with a 4.7 percent IRR, the median was 1.3x with an 8.2 percent IRR, and the top quartile was 1.6x with a 12.6 percent IRR.

The firm has been scoring some exits, although those sales appear to be coming from its older funds. In December, for instance, Charlesbank Capital sold Tecomet, a manufacturer of components used for medical devices, aerospace and defense markets, to Genstar Capital. Terms were not disclosed. The firm had bought the company in September 2008 in a carve-out transaction from strategic owner Cardinal Health.

Charlesbank Capital is said to be preparing to come back to market to raise its next fund in mid-2014, suggesting those recent funds and exits will get an extra dose of scrutiny from LPs this year. A person with knowledge of the plan said the firm will seek to raise about $1.5 billion for Charlesbank Equity Fund VIII LP and possibly cap it at $1.75 billion.

Perhaps in anticipation of the fundraise, the firm made a pair of moves in 2013 to fortify its management ranks. Last January, it named Kevin Brown to be its chief financial officer. Brown, who has been with Charlesbank Capital since its inception in 1998 and before that at Harvard Private Capital Group and at Harvard Management Company, had served for the past several years as senior vice president of finance and accounting. And in September, the firm appointed John Vander Vort as its new chief operating officer. Vander Vort, who had previously been with MPM Capital, a venture capital firm dedicated to the life sciences where he served as chief operating officer and chief compliance officer, took over the COO post from Charlesbank Capital co-founder Michael Thonis, who continued on as a managing director with the firm, focusing on investor relations.

If Fund VIII does launch as anticipated, it will continue a pattern that the firm has pursued for more than a decade, with a stepwise increase in commitments for each successive fund. Fund V, a 2000-vintage vehicle that was the first to include investors outside of Harvard Management Company (manager of the Harvard University endowment), raised $591 million, topping its $500 million target, according to the Thomson One private equity database. Its successor, raised in 2005, hit its $918 million target, and Fund VII, from which the firm is currently investing, attracted $1.5 billion of commitments during the Great Recession year of 2009, according to Thomson One.

It isn’t clear how Charlesbank Capital’s earlier bets on housing have done, and the firm declined to comment for this article. But with the U.S. housing market very much on the mend, and Charlesbank Capital having invested toward the bottom, they may well have turned out to have been exceptionally well-timed.

And if so othey should give a lift to Charlesbank Capital when it heads out to raise its seventh partnership.