K1 Investment plans Fund IV final close on $1.5 bln in April

  • New fund is K1’s largest to date
  • Firm has netted a 27.8 pct aggregate IRR across its prior funds
  • Fund IV to invest in lower-mid-market enterprise-software companies

K1 Investment Management is planning to close its fourth fund next month, memos released by Pennsylvania Public School Employees’ Retirement System show. The firm set a $1.5 billion target for Fund IV.

The $53.5 billion retirement system committed up to $100 million to the fund, which is expected to make 10 to 15 investments in B2B enterprise-software companies. The general partnership group’s commitment will represent at least 2 percent of Fund IV’s total capital, a Hamilton Lane memo prepared for the system says.

K1 focuses on lower-middle-market software companies with enterprise values of up to $200 million. The firm also has a dedicated operations group, K1 Operations, which it uses to effect changes to its portfolio companies’ business practices.

The market for enterprise-software companies has grown increasingly expensive in recent years as PE firms specializing in the industry raised larger and larger funds. Technology-focused private equity funds closed on $40 billion last year, more than double the record $17 billion that tech-focused firms raised in 2013, according to data provider Preqin.

K1’s newest fund would be its largest to date at $1.5 billion. An SEC filing for its previous fund, K3 Private Investors, indicates the firm set a $500 million target — though it reserved the right to raise more.

Each of the firm’s previous funds generated top-quartile returns for their respective vintages, according to a PSERS staff memo. K1 netted an aggregate 27.8 percent net internal rate of return across its previous funds as of Sept. 30, 2017.

“If you’re growing under 30 percent in software, you’re a dog. Nobody wants to talk to you. If you’re above that level, you might have an IPO opportunity and you’ll get a really nice growth multiple,” K1 Founder and CEO Neil Malik said at Buyouts Insider’s Emerging Manager Connect Outlook conference this year.

“We’re focused on companies that generally aren’t growing quite as fast as the rest of the pack, can use some work, and that’s where our operations team can come in,” he said.

In addition to Malik, Fund IV’s investment committee includes Managing Partners Dan Ghammachi, Taylor Beaupain, Hasan Askari and Ronald Cano II, the Hamilton Lane memo says. New investments require unanimous approval.

Malik declined comment on this story.

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A view of Tatra mountains is seen after a training of Polish mountaineers as they prepare for the expedition to scale K2 in the winter at Tatra Mountains near Zakopane, Poland, on Dec. 12, 2017. Photo courtesy Reuters/Kacper Pempel