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Meet The Most Promising Emerging Managers

The three keys for emerging manager success in today’s fundraising market?

Grove Street Advisors, an advisory firm that got its start in the late 1990s managing an emerging managers program for California Public Employees’ Retirement System, says it’s the following: team and strategy cohesion, operational know-how, and a good track record. (Grove Street prefers groups that have generated an average of 3x returns invested capital.)

In this feature, as we do once a year at this time, Buyouts takes a close look at half a dozen firms that, while their size and strategies differ, have these qualities in spades. The founders of EDG Partners, for example, have operational and financial backgrounds that help them pursue growth equity and small-market buyouts in health care, while the team at Siris Capital Group, which pursues tough-to-pull-off transactions in technology, telecom and health care, has been investing together form more than a decade.

Although proven firms arguably carry less risk for investors, emerging managers allow limited partners to cement relationships with talented professionals at more favorable terms. Sycamore Partners, whose founders recently spun out of Golden Gate Capital, recently agreed to lower its proposed management fee to 2 percent from 2.5 percent. At the same time, investors know that some of the most successful firms score their best returns with their earliest funds. In fact, Buyouts has identified 14 investors that have more than $15.7 billion specifically allocated for emerging managers (see table, pages ).

For bankers, attorneys and other service providers, emerging managers represent a potentially lucrative new source of business. For established general partners, emerging managers present more competition, but also co-investment opportunities.

Luckily for emerging managers, the fundraising market has thawed a bit lately. As of Aug. 1, emerging managers—which we loosely defined as buyout, growth equity and turnaround firms raising their first or second fund—raised $9.27 billion, or about 24 percent of the $40.6 billion raised by all U.S. buyout shops up to that date. That’s a slight increase over the $7 billion the same sample raised in a comparable period in 2010. Last year, funds raised by emerging managers accounted for about 24 percent of the $61.9 billion raised by all buyout firms.

EDG Partners, Arlington, Va. Founded: 2004

Strategy: Growth equity and small-market buyouts in health care IT, distribution, outsourced services, disposables and consumables

Top Executives: Alan Dahl, Stephen Eaton, Michael Gaffney

Fundraising History: Seeking for $150 million for Fund II

Backers: Credit Suisse, Hamilton Lane Advisors LLC, Private Advisors LLC

Secret Sauce: Boutique with operational and financial experience targeting small, niche health care plays

EDG Partners, based in Arlington, Va., is garnering support thanks to its team’s history of working together and experience as both investors in and operators of health care companies.

The co-founders met in 2002 when Mike Gaffney, who led health care investments for Allied Capital Corp., partnered with future co-founders Steve Eaton and Alan Dahl in the acquisition of Housecall Medical Resources Inc., a provider of home health services and products. Prior to Housecall, Eaton and Dahl were also both executives at Centennial HealthCare Corp., a provider of nursing and other long-term services that Eaton founded in 1989 and merged with a portfolio company of Welsh Carson Anderson & Stowe in the 1990s.

In 2004, Eaton, Dahl and Gaffney formed EDG Partners and embarked on seven deals, funded on a deal-by-deal basis with their own capital as well with commitments form other private equity firms and high-net worth individuals. The firm has so far exited four of those seven deals, which together it categorizes as “Fund I.” In 2009, the firm started raising EDG Partners Fund II LP, seeking $150 million (see related fundraising story p. TK). So far it has secured $92 million in commitments.

EDG Partners typically invests $5 million to $25 million per deal in sub-sectors such as health care IT, distribution, outsourced services, disposables and consumables; it avoids medical devices, biopharmaceuticals or lifesciences companies reliant on approval from the Federal & Drug Administration.

Flexpoint Ford LLC, Chicago, Ill.Founded: 2005

Strategy: Buyouts in financial services and health care

Top Executives: Gerald Ford, Don Edwards

Fundraising History: Closed first fund with $225 million in commitments in 2005; in 2008, raised $1.28 billion for Fund II

Backers: Fort Washington Capital Partners, Grove Street Advisors, Yale University

Secret Sauce: Operations-oriented shop with laser focus on financial services and health care

Flexpoint Ford LLC took off fast following its founding in 2005, thanks in part to the extensive experience of its founding partners and its focus on two areas: health care and financial services.

The firm is the result of the partnership between Don Edwards, a former principal GTCR Golder Rauner who specialized in health care deals, and Gerald Ford (no relation to the president), a billionaire executive with more than 30 years experience in the banking and financial institutions, notably as CEO of Golden State BancCorp., a struggling bank he helped turnaround in the late 1990s.

In 2005, the firm raised $225 million for its debut fund. Catherine Crockett, managing partner at Grove Street, an investor in the fund, said that many professionals with their experience would have sought a much larger fund. “They weren’t oriented toward fees but how they could maximize returns on the fund,” she said.

That changed some in 2008 when Flexpoint Ford raised $1.3 billion in commitments. The firm split the commitments into two vehicles: about $800 million to pursue a strategy identical to Fund I, with a focus on health care and financial services; and about $480 million to take controlling stakes in struggling banks and other financial companies. The jump in fund size gave some investors pause. “We had to think about it quite a bit, because we like the small size of the initial fund,” said Crockett, of Grove Street, which backed the fund. “But we felt that in that particular circumstance Gerry’s experience was pretty unique and worth capitalizing on.”

The firm now has at least 14 investment professionals, including associates, according to its Web site. Executives at Flexpoint Ford did not return calls seeking comment.

Goode Partners LLC, New York, NYFounded: 2005

Strategy: Buyouts and growth investments in consumer brands and services, retail

Top Executives: Ron Beegle, Daniel Bonoff, Joe Ferreira, Keith Miller, David Oddi

Fundraising History: Raised $225 million for debut fund in 2007; currently seeking $300 million

Backers: New Mexico Educational Retirement Board

Secret Sauce: Consumer focused shop capitalizing on successful IPO to raise Fund II

Goode Partners LLC has made a name for itself buying lower mid-market consumer-focused companies. Its portfolio includes AllSaints, a London-based retailer of fashion apparel and accessories; Bowlmor Lanes, a New York-based operator of upscale bowling alleys; and Skullcandy Inc., a maker of colorful audio headphones that recently went public

The firm is in the market seeking $300 million for its sophomore fund. Executives started talking to investors a few months ago, but most wanted to see how Skullcandy Inc.’s initial public offering performed. The company raised $188 million on July 20 after pricing its shares at $20 each, above the expected range of $17 to $19 (though it traded higher initially, it was trading in the $16.40 to $16.99 range the afternoon of Aug. 5). The firm maintains an 8.1 percent stake.

The firm still has some proving to do. The Skullcandy IPO was only its second liquidity event, the other being a dividend recap in of Chuy’s, a chain of Mexican restaurants in Texas that recently filed to raise $75 million in an initial public offer.

David Oddi, a former partner at Saunders Karp & Megrue; Ron Beegle, the former chairman of Global Consumer Retail Investors, a consulting firm; and Joe Ferreira, the former CEO of Woodclyffe Group LLC, a consulting firm, started Goode Partners in 2005. The firm has five senior investment professionals and four advisory partners, according to its Web site.

Executives at Goode Partners declined to comment.

Siris Capital Group, New York, NYFounded: 2011

Strategy: Complex deals in technology, telecommunications, and health care services

Top Executives: Frank Baker, Peter Berger and Jeffrey Hendren

Fundraising history: Seeking $400 million

Backers: Teachers’ Retirement System of the State of Illinois

Secret Sauce: Buyout group scores outsized returns with two parents

Siris Capital Group is that rarity, a spin-out of a spin-out: Lead executives Frank Baker, Peter Berger and Jeffrey Hendren launched the firm in early 2011 after spinning out of the hedge fund SAC Capital, which they joined in 2007 from the private equity firm Ripplewood Holdings LLC, where they worked together for 10 years.

The firm is turning heads thanks to the group’s history together and its returns. The firm has invested a total of almost $1.2 billion—$600 million under SAC Capital’s banner, and $576 million under Ripplewood—returning a net internal rate of return of around 40 percent, according to one source, though that couldn’t be confirmed elsewhere.

The group has hit at least a couple of home runs, including Airvana Corp., a company that provides products used by wireless operators to provide mobile broadband services. The group took it private in mid-2010, and has already earned 3x its equity investment of roughly $150 million with two leveraged recapitalizations, while still owning the company, according to the same source.

Siris Capital is seeking $400 million for its debut fund, and recently won a $45 million pledge from the Teachers’ Retirement System of the State of Illinois. The firm targets complex deals, including turnarounds, in the technology, telecommunications and health care services sectors. The firm, which has five senior partners, has not yet struck its first deal under the Siris Capital banner.

Stripes Group, New York, NYFounded: 2003

Strategy: Typically invests $20 million to $30 million of equity in its deals, targeting companies involved in the Internet, digital media, e-commerce, enterprise software, information technology and other software-related assets

Top Executives: Ken Fox, Dan Marriott

Fundraising History: Closed on $180 million in commitments for its debut fund in March of 2010; n March of 2011, Buyouts reported it was preparing to raise its second fund and would seek more that it secured for its debut

Backers: Horsley Bridge Partners, StepStone Group LLC

Secret Sauce: Experience building fast-growing companies

With Stripes Group, investors have been drawn to its executives’ experience as entrepreneurs.

Ken Fox, who previously co-founded publicly traded investment firm Internet Capital Group, among five other companies, founded Stripes in 2003. The other managing partner is Dan Marriott, who spent 11 years in various roles with internet company IAC/InterActiveCorp., including overseeing the company’s M&A activity and as founding CEO of Pronto Inc., a comparison shopping web site owned by IAC. Stripes has 10 investment professionals in total, as well as five operating partners.

“Both of the main principals have very relevant experience helping to build and manage very fast growing businesses,” an executive with one investor in Stripes told Buyouts. “They have been entrepreneurs so they can really connect with the entrepreneurs that they invest with.” This source also said “there is a very strong alignment of interest among the GP and the LPs,” though he declined to discuss details.

Buyouts reported in March that Stripes was pre-marketing its second fund, though it did not yet have a target. Fox and other executives declined to comment.

Sycamore Partners, New York, NYFounded: 2011

Strategy: Expected to target deals in the retail and consumer products sectors, among other sectors

Top Executives: Stefan Kaluzny, Peter Morrow

Fundraising History: Seeking $500 million to $1.5 billion

Backers: Unknown

Secret Sauce: Ambitious Golden Gate spin-out with experience buying, running companies

Sycamore Partners, perhaps the newest firm in our feature, is generating buzz thanks to founder Stefan Kaluzny’s background in consumer and retail, and his leading role in several deals while at Golden Gate Capital, the San Francisco-based firm he left earlier this year to launch Sycamore Partners. Kaluzny-led deals include the acquisition of Romano’s Macaroni Grill, the buyout of clothing retailer Express Inc. and an investment in jewelry retailer Zale Corp., among others. Sycamore Partners recently struck its first deal, taking a 9.9 percent stake in women’s clothing retailer The Talbot’s Inc. for about $21.6 million.

“When he has a vision and an investment thesis, he goes after it with vim and vigor,” said a banker who worked closely with Kaluzny on an acquisition and an initial public offering. He also described Kaluzny as “a man of his word” who is open to advice. “You can imagine these PE guys who are successful at young ages can be insufferable. He’s not one of them.”

Kaluzny, a former managing director who joined Golden Gate in 2000, was previously a consultant with Bain & Co., where as a member of the private equity group he advised clients with companies in the airline and consumer products industries, according to Capital IQ. He also was a co-founder and CEO of Delray Farms, a Hispanic specialty food company. Kaluzny brought with him to Sycamore Partners Peter Morrow, a former principal at Golden Gate, where he worked on deals in consumer products, retail, travel and leisure and other sectors.

Sycamore Partners is seeking $500 million to $1.5 billion for its debut fund. The firm has had to make some concessions on terms, such as by lowering its proposed management fee to 2 percent from 2.5 percent. It’s unclear if any LPs have committed to the fund yet.