Frontenac Co. Targets $600M For Fund VIII

Frontenac Co. – a private equity 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 LPs 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 LP and a $15 million fund, Frontenac Masters VII LP, that it raised from corporate executives and industry experts in which it does not charge a carry but receives deal flow, McEniry said. The group raised its present funds in 1997.

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.”

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 Frontenac, said the firm has benefited 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 Fund VI 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 from Fund VI, to a public offering. Frontenac recently did the same with another company from that fund – Zany Brainy, a retailer of educational products.

A Need for More Capital

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; Comprehensive Medical Management, a chain of eye care centers in New York; SI International, an integrator of information technology for the government; and Chipolte Mexican Grill, a restaurant chain.

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.

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, 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.

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

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

Sequoia Franchise Fund Hits Late-Stage

Citing a desire to participate in more late-stage financing opportunities, Sequoia Capital Partners recently closed on the $350 million Sequoia Capital Franchise Fund, which will invest in the firm’s existing portfolio companies.

“We noticed over the years that a lot of value was created post-initial public offering,” said Sequoia General Partner Mark Stevens. “We will invest in opportunities created prior an IPO where we feel we can still get good value.”

The Franchise Fund has committed approximately $50 million to Sequoia portfolio companies, since closing in April, including MedicaLogic Inc. (PEW, June 14, p. 3), Broadband Sports and MP3.com. Stevens said the fund, on occasion, will consider first time investments.

The fund will invest between $3 million and $15 million in companies in the Internet, communications equipment and enterprise software industries.

Stanford University, The Ford Foundation and Harvard University are among Sequoia’s existing limited partners that have invested in The Franchise Fund. Stevens said more than 95% of the fund was raised from the existing pool of investors. The fund is managed by the same general partners of Sequoia’s other funds.

Stevens would not disclose management fees or the carried interest split. He said the fund will make its next investment within the next few weeks.