Go Go Gadget Carry: Insight Equity Shoots for 30%

Insight Equity II is just a little more aggressive than its predecessor. The $500 million fund, which is in marketing mode right now, has the potential to collect 30% carried interest on its investments, depending on returns. That’s an increase from Insight Equity’s first fund.

In addition to that, Insight is raising a $275 million mezzanine fund and suggesting a 1:1 investment in both vehicles for new LPs. More on that below.

The breakdown for the carried interest on Insight Equity II is:

20% until 2.5x
25% from 2.5x to 4.5x
30% after 4.5x

It’s not a completely revolutionary structure, firms have done it before (though I can’t think of any at the moment). The move seems to follow the advice of partners at SCM Capital, who wrote “Carried Interest: 20%, and don’t even think about trying for something higher unless your firm is really something special,” in Buyouts in May. If a 2.5x or higher return is something special, then Insight is in luck. That is, if they hit those numbers. The firm’s turnaround strategy means it buys companies very cheaply,  so its not impossible. (Remember Sun Capital’s 68x return on Mattress Firm?)

No comment yet from Insight on the reasoning behind it.

One note on the mezz fund. On one hand this is a great way to have zero contingencies in a deal. With all the reneging and skiddishness going on, that’s becoming a bigger deal for sellers. Having mezz in place would diminish that concern immediately.

But as one source put it, “There’s no shortage of mezz money available. It’s one thing to arrange your own mezzanine, it’s very different to try to underwrite it.”

Earlier: Insight Equity versus Prophet Equity.