Sorenson Capital, Bertram Capital Management LLC, Harren Equity Partners, Mainsail Partners, Excellere Partners and High Road Capital Partners — since 1999, these six firms alone have raised $2.3 billion for small and mid-size transactions, according to an analysis by Buyouts magazine.
Altogether, U.S.-based emerging managers — loosely defined as buyout firms working on their first or second funds — collected some $7 billion in the first half of 2010, or more than a quarter (25.5 percent) of the $27.4 billion raised by all U.S. buyout shops.
Backing these emerging managers are pension funds, college endowments, foundations and other institutional investors looking for returns that handily beat those available in public markets.
While many established buyout shops struggle to raise fresh capital, many investors have an ongoing appetite for backing new firms. Partners there are seen as hungry to establish track records, and many pursue highly focused strategies — by industry, by region — that offer diversification to investors struggling to invigorate mature private-equity portfolios.
“We think, in the long run, that one of the most attractive parts of the buyout industry are the smaller, operationally oriented funds that are on their way to become the new leaders in the industry,” said Clint Harris, founder and managing partner of Wellesley, Massachusetts-based Grove Street Advisors.
His firm typically commits some $500 million a year to private equity funds and has made a specialty of identifying up-and-comers. “In Grove Street’s perspective, we want to catch them early in the cycle. Once they get over $1 billion, we begin to get concerned with scale.”
The Buyouts magazine analysis of six emerging managers finds that most got their start after the founding team spun out of an established buyout firm.
They also tend to search for deals in regions of the country that get overlooked by rivals located in New York and Chicago, where most firms set up shop. More about these firms below.
Sorenson Capital launched in 2003 thanks to the Bain Capital lineage of its founders and a unique strategy that calls for a hands-on approach to operating companies in the Mountain West and West Coast regions.
Fraser Bullock, who started at Bain & Co. in 1980 and helped launch Bain Capital in 1984, founded the Lehi, Utah-based firm. It raised $400 million in 2008 for its second fund.
Bertram Capital, which has secured at least $500 million for its second fund, invests in buyouts and growth financings of companies generating $3 million to $15 million of EBITDA in business services, health care, manufacturing, aerospace, and clean technology.
Jeff Drazan, a former venture capitalist, founded the San Mateo, California-based firm in 2006 with his brother Ken Drazan, a former liver transplant surgeon.
Charlottesville, Virginia-based Harren Equity Partners prides itself on finding deals where others wouldn’t think to look. It invested in one mining industry services company based in Vansant, Virginia, a town with a population of 989 in the 2000 Census.
Investing from its $200 million second fund, Harren Equity backs companies generating $20 million to $150 million in revenues in energy services, aerospace, defense, automotive, business services, and building products and services.
Mainsail Partners, based in San Francisco, raised $110 million in 2008 for its second fund, earmarked for buyouts and growth equity investments in technology enabled services, software, e-commerce, Internet marketing, wireless technology, for-profit education and financial services, among other sectors. Its founder, Gavin Turner, earlier worked at Boston-based Summit Partners, where he was responsible for West Coast media and communications investments. He founded Mainsail in 2003.
Robert Martin and David Kessenich founded Denver-based Excellere Partners to get back to their small-deal roots. Their prior firm, KRG Capital Partners, had raised successively larger funds, culminating in 2007 with a $2 billion fourth fund. Excellere raised $265 million in 2007 for investments in business services, education, health care, industrial technology and services, and specialty foods.
Bob Fitzsimmons generated a buzz in 2007 when he became the first person in the 22-year history of The Riverside Co., a New York-based firm, to leave and start his own firm. High Road Capital Partners, also based in New York, raised $150 million to sponsor buyouts of distribution services and manufacturing companies with EBITDA of at least $3 million.