- Chicago firm beats target with first fundraise in seven years
- Solid returns from Fund VIII fuels demand for Fund IX
- Founder says firm’s crisis-era funds “as close to ground zero as you can get”
Charles Moore had trouble sleeping over the last few years.
The Banc Funds Company founder’s voice strains when he describes his firm’s sixth and seventh private equity funds, both of which amassed significant exposure to banking and financial services assets prior to the Global Economic Crisis. Banc Funds, which is based in Chicago, invests in subregional banks, thrifts and other companies that were “about as close to ground zero as you can get,” Moore said in an interview.
“The last seven years have been about as humbling as can be,” he said. “We were in a very hard-hit industry. We were saved by a lot of the things we’d done for a long time — but not saved entirely.”
Seven years and one fitful economic recovery later, Moore may finally rest easy. Banc Funds closed its ninth flagship fund on more than $536 million in December, surpassing the fund’s $500 million target after roughly two years in the market.
It wasn’t an easy sales pitch. Banc Funds keeps a low profile — it doesn’t have a website — and the firm was six years removed from its previous fund close when it launched Fund IX in early 2014. Banc Funds performed consistently well through the 1990s and and early 2000s, netting internal rates of return in the 15 to 20 percent range and generating cash-on-cash multiples in excess of 2x on Funds III, IV and V, according to data collected by Bison, which tracks private equity fund performance.
Returns collapsed with the economic downturn. Fund VI, Banc’s 2002 vintage, netted a 2 percent IRR and 1.18x as of June 30, Bison said. The firm’s $300 million 2005 vintage Fund VII netted a 0.26 percent IRR and 1x multiple for that same period, according to Washington State Investment Board (WSIB), an investor in the fund.
While those returns fell short of expectations, neither fund is in the red and both are poised to at least return LPs’ capital, Moore said. He expects Funds VI and VII to generate meaningful returns as they wind down.
“We didn’t walk away from the funds,” Moore said. “We managed them. We protected capital.” The firm was careful to distribute both vehicles’ investment capital across a range of assets, markets and geographies to limit downside, he said.
Banc Funds went on to improve its position with its Fund VIII, a $600 million 2008 vintage that netted a 13.9 percent IRR as of June 30, according to WSIB documents.
In fact, Fund VIII’s performance spurred demand for Fund IX. The new fund received commitments from 35 limited partners, including insurance companies, pension funds, funds-of-funds, endowments and family offices, according to a recent press release from Banc Funds. WSIB, an active LP in four of the firm’s previous funds, allocated $100 million to Fund IX, while longtime investor Minnesota State Board of Investment committed up to $125 million.
“As we move further from the events of 2007-2011, I think we will find opportunity that we’ll be able to capitalize on, and it’s our hope we get back to a world of fewer dislocations,” Moore said.
Banc Funds plans to commit as much as $10 million per deal through the new vehicle, which is already around 30 percent invested. The firm will likely invest in growth equity deals and recapitalizations.
Recent market volatility since the start of the New Year may help the firm enter new deals at attractive valuations, Moore said. He also wants to target assets in undervalued markets facing challenges because of fading industry — regions that resemble Pittsburgh several decades ago. Moore plans to pursue deals in cities “that aren’t stacked with social media and biotech companies.”
“We’re in a sector where, with these smaller companies, a group of them were out of favor for seven years,” he said. “I don’t want to imply its low-hanging fruit or picking hundred-dollar bills off the ground … This is not the easiest industry in which to invest. The regulation dwarves other industries. The accounting is arcane. There are reasons why these investments are undervalued.”
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Photo of Charles Moore courtesy of The Banc Funds Company