FIVE QUESTIONS WITH… WILLIAM HOBBS II, Managing Partner, Carousel Capital

1. Your firm just closed on its latest fund, Fund IV, having raised $266 million. What do you do the first day after you close a fund? And are firms like yours always fundraising at some level?

There’s not much time for celebration. We redouble our efforts to focus on deal sourcing, and really try to find our next few investment opportunities. But I don’t think we’re constantly fundraising. What firms like ours have to do is manage relationships with our limited partners and make sure we’re communicating well and sticking to our knitting in terms of the types of investing that we do. But given that we’re a small buyout firm, we don’t need to constantly be out there cultivating new relationships because our fund sizes are fairly small.

2. Besides returns, what are your investors are most looking for?

Investors are very focused on your firm’s strategy. Our strategy has a regional focus in the Southeast, where we focus on small buyouts of $150 million or less. Having strong relationships in the region is critical to developing direct deal flow. While most of our funding is institutional, we also have more than 100 current and former CEOs who invest with us, which helps us from a sourcing standpoint. And those relationships, plus a large network of other relationships we’ve built in the region over 17 years, give us a real competitive advantage.

3. Do some of your investors have a “Southeastern allocation,” or are investors mostly interested in your firm because its regional focus helps you from a deal origination standpoint?

Investors are simply looking for firms that can demonstrate a differentiated strategy, and our Southeastern focus—in addition to a sector focus on business services, consumer products and services, and health care services—has made investors attracted to our funds.

I would say also say that being in Charlotte is beneficial since it has a large and growing financial community plus a large pool of financial talent. It’s the headquarters of Bank of America and used to be home to Wachovia. Being in Charlotte allowed us to build a great team, and there are other private equity firms based here too, including Frontier Capital, Pamlico Capital and Ridgemont Equity, to name a few. 

4. Can you tell me about a deal that worked out well for you?

Our most recent exit was a company called Axiom Health Care Pharmacy, based in Florida. We recently exited that business very successfully by selling it to Kroger, the grocery chain. Axiom is a specialty pharmacy company that delivers drugs through the mail to people with rare and chronic conditions. It was a typical Carousel deal in that we were able to source the deal directly through one of our relationships, so there was no investment banker involvement. And it was a company we were able to grow dramatically, with revenue increasing more than five-fold, mostly organically.

We achieved that by investing in the company’s data management and technology capabilities to make it more strategic and to improve its importance in the sector. That made it a very attractive for Kroger. Although Kroger was already in the retail pharmacy business, a specialty pharmacy like Axiom was very important business for the company since it allowed them to serve the full range of pharmacy customers.

5. What is your impression of the market for deals and the market for exits? 

We think it’s a terrific time to invest. There’s still some uncertainty, obviously. But we feel the economy is starting to pick up a little bit, particularly in the lower-middle market and in the Southeast, which is our focus area. There are still thousands of companies out there and plenty of entrepreneurs looking for partners that will help them grow their businesses. And more than ever, these entrepreneurs want help. It’s not only the capital that we provide, but its also the know-how that helps these businesses grow that creates demand for our capital. And because we already have a great pipeline of opportunities for our newest fund, we think it’s going to be a great time to invest.