Three Cities Preps $400 Million Fund –

Private equity firm Three Cities Research, which specializes in acquiring underperforming public companies, is preparing to enter the market in the first half of 1999 with a third U.S. fund that will target between $300 million and $500 million, said President Willem de Vogel.

The New York firm, after closing several deals it is currently working on, will have committed about 70% of the $245 million Three Cities Fund II, L.P. raised almost three years ago (BUYOUTS March 25, 1996, p. 9). Three Cities Fund III, L.P., like its predecessor, will offer L.P.s a 7% hurdle rate and charge a 2% management fee on committed capital, Mr. de Vogel said.

Lately, Three Cities has been investing at a quicker pace than it had in prior years as a result of the opportunities it is seeing in small public companies whose values have fallen since the markets declined in August.

“The one thing that is very clear is in the public markets you have small companies with valuations that have been absolutely hammered,” Mr. de Vogel said, adding that his firm has experience rescuing these types of businesses and believes many of them now need help.

The firm targets companies in which management needs to be replaced or in which shareholders are having disputes with the boards of directors. Three Cities also invests in corporate orphans and private companies that are underperforming.

This month, Three Cities is closing a $34 million all-equity investment to acquire Cohr Inc., a Chatsworth, Calif.-based business that maintains equipment and provides group purchasing for hospitals. Cohr’s stock plunged from a peak of $30 per share on NASDAQ in 1996 to about $4 per share before Three Cities made its $5.33 offer. The company’s stock suffered after it had to restate earnings in fiscal 1997 and the first two quarters of 1998 because of accounting mistakes.

Three Cities invests in basic industries and usually commits between $15 million and $20 million in equity per deal, and often, as with Cohr, does not leverage its investments. The firm’s buyouts in Fund II include Ha-Lo Industries, a distributor of promotional products, and New Pameco Georgia Corp., a distributor of heating, ventilation and air conditioning systems.

The group does not have any return figures from Fund II and has realized about $40 million from the partnership, Mr. de Vogel said. In the firm’s $194 million first fund, which included investments made in the U.S. and Europe, Three Cities made about two-thirds of its investments domestically and has a 28% net IRR in those investments, and has returned more than $300 million from those U.S. investments to its L.P.s, Mr. de Vogel said.

Need to Specialize Spawns to Groups

In 1995, Three Cities split its U.S. and European arms and in 1997 raised a $100 million buyout fund to invest in continental Europe. The firm has invested 55% of that partnership, and it will likely not raise a new European effort until late this year or in 2000, Mr. de Vogel said. The group last year also launched a buyout fund targeting Argentina and set a $300 million target; it has closed on $93 million for TCR South America Fund, L.P.

The Bemberg Group, the French and Argentinean family that owns one of South America’s largest breweries, backs Three Cities and is expected to commit more than 30% of the capital in the firm’s new effort. The firm is called Three Cities because of the Bemberg’s offices in France, Argentina and the U.S. Three Cities has local investment teams in each location that work independently of each other.