Gil Lamphere Markets $500 Million Offering –

Gilbert Lamphere, the former co-head of publicly traded buyout firms Prospect Group and Noel Group and most recently managing director at Fremont Partners, is considering launching a new buyout fund that will target more than $500 million.

Last year, Mr. Lamphere resigned from San Francisco-based Fremont Partners after a four-year stint because, he said at the time, he wanted to move back to the East Coast (BUYOUTS April 6, 1998, p. 4). However, several G.P.s and intermediaries who are familiar with the situation said Mr. Lamphere actually left because he was frustrated he could not lead more investments at Fremont using the financial structures he helped innovate at Prospect and Noel. Mr. Lamphere declined comment for this article.

The new firm, which has yet to be named, will look to acquire mostly large minority stakes in small-cap public companies. Mr. Lamphere claims the firm’s investments will have exit strategies built into them, said a source who met with him. The source declined to provide additional information.

Recruiting Some Old Friends

To help staff the effort, Mr. Lamphere is planning to work with several of the partners from his former firms. Mr. Lamphere also has started meeting with placement agents about raising the fund, according to industry sources.

Noel and Prospect were holding companies for investments, and both currently are in different stages of liquidation. Noel entered into a plan of liquidation in March 1997 (BUYOUTS March 10, 1997, p. 3) and last month proposed the distribution of trust units in one of its last three holdings-Career Blazers, a company that trains employees-to its shareholders. In addition to Career Blazers, the firm still holds stakes in Carlyle Industries, a button packager and distributor, and Ferronorte Particioacoes, S.A., an operator of railroads in Brazil. Meanwhile, the Prospect dissolved several years ago and spun off many of its investments-such as Sylvan Foods and Forschner Group, a maker of Swiss Army knives-to Noel in the early 1990s.

Both firms used leverage to acquire minority stakes in struggling companies. In some cases, the businesses would then rebound, and the firms would spin off their shares in the investments, forming new companies by distributing stock to shareholders, just as the investments were returning to health. In this manner, the buyout firm would avoid paying capital gains taxes, as it was distributing shares and not cash, thereby realizing greater value for its investors, sources said.

Prospect was formed in the mid 1980s by Louis Marx. After forming the group, Mr. Marx took in Mr. Lamphere, then an investment banker at Morgan Stanley & Co., as his partner. After Noel exited some of its investments, Mr. Marx resigned in 1996 to launch Hudson River Capital, a firm that targets middle-market buyouts (BUYOUTS Sept. 2, 1996, p. 3).

Spin-Out Readies Follow-Up Effort

Hudson River has invested more than 60% of its $73 million debut fund and is planning to launch a much larger follow-up vehicle this year, sources close to Hudson River said. Mr. Marx did not return calls.

The track record at Prospect and Noel includes some home runs such as a $16 million leveraged investment in MidSouth, which owns 400 miles of railroad track in Louisiana and Mississippi, in 1985. That investment turned into a $75 million payday eight years later when rail companies entered into a bidding war to acquire the property.

However, there also are some underperforming investments in the two firms’ portfolios, such as Belding Heminway Co., a button and thread business, industry sources say. The company took on charges of $40 million in its effort to divest an unprofitable home furnishings division, $18 million from the divestiture and $22 million as a restructuring charge, impacting earnings in 1997.

A Blueprint for Today’s Strategy

At Fremont, the group had invested about 30% of its $605 million debut fund at the time Mr. Lamphere resigned. One of its larger investments was a minority stake in publicly traded Kinetic Concepts, a medical furniture manufacturing company. The stake allowed Fremont and Richard C. Blum & Associates, L.P. to take the business private (BUYOUTS Aug. 4, 1997, p. 8), a scenario Mr. Lamphere might well follow in his current effort.

As far as the fund raising is concerned, sources warned that Mr. Lamphere may not find it easy to raise more than $500 million for a vehicle that acquires stakes in public companies and offers an 80%/20% carried interest split. For starters, funds-of-funds are not inclined to invest in private equity funds that have a public equity investment strategy.

Richard C. Blum & Associates, has taken 18 months to raise RCBA Strategic Partners, L.P., a fund that will look to acquire minority stakes in public companies. However, the firm now has raised $640 million, thereby reaching its target, and soon will close the fund.