Frontenac Co. Targets $600M For Fund VIII –

Frontenac Co.-a firm that dates back to 1971-is preparing to come to market with its eighth fund that likely will target between $500 million and $600 million, according to industry sources.

“We are contemplating a new fund but we haven’t gone to our L.P.s yet,” said Roger McEniry, a partner at the firm. He said the group had yet to settle on a target.

In less than two years, the Chicago-based buyout firm already has committed 75% of the $300 million Frontenac VII, L.P. and a $15 million fund, Frontenac Masters VII, L.P., that it raised from corporate executives and industry experts in which it does not charge a carry but receives deal flow, Mr. McEniry said. The group raised its present funds in 1997 (BUYOUTS Oct. 13, 1997, p. 9).

The current efforts have seen one partial exit out of 12 investments: the initial public offering of Allegiance Telecom, a company that offers businesses local, long-distance and Internet services. Madison Dearborn Partners and Morgan Stanley Capital Partners are the lead investors, with Frontenac as a co-investor.

A gatekeeper who met with the firm to discuss Fund VII said he was not impressed by the firm’s track record.

“They like to say, We go back to 1971,’ and they only want you to look at a seven-year performance history,” the gatekeeper said. “We had a sense they had not hit their stride as a firm.”

Mr. McEniry declined to give IRR numbers for the sixth fund. He said Fund VII had an early gross IRR of 60% and the firm has had a four-year gross IRR of 47%.

Rodney Goldstein, general partner at the group, said the firm has benefitted from its 28-year history as it has sourced 75% of its investments in Fund VII from executives and consultants who invested in the Masters fund and who, over the years, have become friends with the firm.

In May, the firm suffered a disappointment when portfolio company Chernin’s Shoes filed for bankruptcy protection. The group had invested $10 million in the company. Meanwhile, the firm recently took Focal Communications, a competitive local exchange carrier, to a public offering. Frontenac is about to do the same with Zany Brainy, a retailer of educational products.

The group’s strategy is to make investments of $20 million each in growth financings and buyouts. Frontenac had an unusual provision in Fund VII that limited it to only committing up to 10% of its capital, or $30 million, in any one deal. The new fund may have a larger 15% cap that could allow the firm to make as much as a $90 million investment.

A Need for More Capital

The reason for a larger fund is evidenced by a 1998 co-investment backing Terry Granuke and Lighthouse Holdings, LLC. Lighthouse is a roll-up focused on acquiring companies in niche marketing services businesses, such as sports and ethnic marketing.

Previously, Mr. Granuke ran Frontenac-backed Eagle River Interactive, a direct marketing and sales promotion platform, and the firm generated a strong return when it sold part of the business to Omnicom Group and merged the IT training part of the company with Platinum Technologies.

Mr. Granuke went to Frontenac first to back his new plan but Frontenac could not invest the $100 million Mr. Granuke needed to build the effort.

So, he and Frontenac turned to GTCR Golder Rauner LLC, with Frontenac co-investing $30 million, Mr. Goldstein said.

Frontenac’s Fund VII has made an eclectic group of investments. The group has invested in 101communications LLC, which publishes magazines and owns conferences that cater to software development professionals (BUYOUTS Jan. 11, p. 13); Comprehensive Medical Management, a chain of eye care centers in New York; SI International, an integrater of information technology for the government; and Chipolte Mexican Grill, a restaurant chain.