Gen Cap back with Fund VII after six years

Lower-middle-market specialist Gen Cap America is marketing its first fund in six years, according to an SEC filing and Rhode Island State Investment Commission documents.

Gen Cap, a 28-year-old firm based in Nashville, set a $225 million target and $250 million hard cap for Southvest Fund VII, according to a fund presentation released by Rhode Island. The firm filed paperwork for the fund with the SEC in December.

Rhode Island approved a commitment of as much as $30 million to Fund VII, spokesman David Ortiz wrote in an email.

Gen Cap will use Fund VII to acquire manufacturing, distribution and services companies, typically investing as much as $20 million per deal, according to a Cliffwater LLC memo.

“Gen Cap is unique in deal structuring by providing both the sub debt and equity to portfolio companies,” Cliffwater Senior Managing Director Thomas Lynch wrote in an investment memo. “This helps lower overall financing risk, accelerates cash flow to the Fund and can improve the overall IRR.”

Fund VI, a $160 million 2009 vintage fund, netted a 16 percent internal rate of return and 1.4x multiple through Sept. 30, according to the presentation. Fund V, which raised $94 million in 2005, netted a 15 percent IRR and 2x multiple as of the same date.

Fund VI’s slower investment pace created a drag on its performance, which dropped the vehicle into the third quartile of 2009 vintage funds, according to Cambridge Associates data cited by Cliffwater.

It’s unclear why Gen Cap spent more time investing Fund VI. The past 10 years have been a period of transition for the firm.  Its senior partners, founder Barney Byrd and Donald Napier III, did not lead a deal in the past decade but remain active in providing guidance to portfolio company management teams, Lynch wrote.

Managing Directors Christopher Godwin, J. Matthew Lane and Mark Isaacs assumed control of the firm’s investment process with Fund V, a 2005 vintage, and “Gen Cap’s investment team has grown and matured since the last [Fund VI] fundraise in 2009,” Lynch wrote.

Gen Cap and Cliffwater did not respond to requests for comment.

Gen Cap will charge LPs a 2 percent management fee on committed capital during the fund’s investment period, according to Cliffwater. The fee falls to 2 percent of invested capital afterward.

The firm will offset management fees with 100 percent of all directors and break-up fees. Monitoring, commitment, acquisition, transaction, advisory, consulting and other similar fees will offset the LP management fee by only 50 percent. Once the fund collects $18.75 million from those fees, Southvest VII will fully offset future fees by 100 percent.

Action Item: For Rhode Island’s materials on Gen Cap, visit http://1.usa.gov/1Rk8H3G

Photo: Reuters/Harrison McClary