William Blair Targets $250M Sub-Debt Fund –

William Blair Mezzanine Capital Partners this month launched its third fund, setting a $250 million target.

Like its $190 million predecessor, William Blair Mezzanine Capital Fund III, L.P. will target investments in recapitalizations and buyouts that are not led by financial buyers. In the past, the firm has helped management teams recapitalize companies from buyout groups such as Trivest and Austin Ventures.

William Blair Mezzanine invests in recaps in which the sellers retain between a 20% and a 50% stake in the business. The firm likely will commit between $10 million and $15 million per investment from the new vehicle.

By finding its own investments and not working with financial buyers, the group believes it can generate higher returns, said Timothy MacKenzie, a general partner with the mezzanine group. The firm is projecting a more than 20% gross IRR for the fund. The group raised its second fund in 1997 and has yet to exit any investments. Its $115 million debut fund, which it raised in 1993, has generated a 30% gross IRR, Mr. MacKenzie said.

Chicago-based William Blair Mezzanine generally secures coupons with interest rates of between 12% and 13%, and it receives equity kickers either at the time of an investment or after it has redeemed its coupons. The group makes 75% of its investments in manufacturing companies, and most of those tranches are made in Midwestern businesses.

In sourcing deals, the group has not seen increased competition from buyout firms as these groups usually look to make investments in larger companies, Mr. MacKenzie said, adding his firm targets companies with revenue between $25 million and $100 million.

Many manufacturing companies currently are going through generational changes, and that creates opportunities for his firm, he added.