Peloton seeks up to $600 mln for debut fund led by Ontario Teachers’ alumni

Peloton Capital Management, a private equity firm founded by former principals of Ontario Teachers’ Pension Plan, has begun raising its debut fund, PE Hub Canada has learned.

The fund, earmarked for long-term investing in select North American sectors, is targeting $400 million to $600 million, people with knowledge of the matter said.

It is expected to hold an initial close early next year.

The fund has already been anchored with a $150 million commitment, the sources said. The capital was supplied by Stephen Smith, CEO of First National Financial Corp, a Canadian mortgage lender.

Bank of Montreal and Toronto-Dominion Bank also intend to make commitments, the sources said.

Peloton declined comment.

Peloton’s doors were opened today by Managing Partners Steve Faraone and Mike Murray, who in June departed Ontario Teachers’ direct PE group, where they served for more than a decade.

In an interview, Faraone and Murray said the firm will officially kick off fundraising in January.

The fund will be marketed to Canadian and U.S. institutional investors, including pension systems, insurers and family offices, they said.

Faraone and Murray expect the offering to meet with a warm reception among LPs thanks in large part to Peloton’s niche investment thesis.

Peloton will make control-stake acquisitions of mid-market companies in North American financial services, healthcare and consumer sectors.

Targeting seven to 10 platform deals through the inaugural fund, it will invest $25 million to $75 million in businesses with Ebitda ranging from $10 million to $40 million.

Significantly, Peloton will also hold assets beyond the usual PE investment period of three to five years.

It will back portfolio companies for eight to 12 years, a span Faraone and Murray say will be attractive to many mid-market owner-operators in sectors of interest.

A long horizon, allied with the firm’s value-adding domain approach, will also help differentiate Peloton in a frothy market environment, they said.

“We believe there is a need for a long-term, sector-focused alternative,” Murray said. “While the market is competitive and there is a lot of capital chasing deals, the opportunity is significant as we are addressing a white space with our unique approach.”

Peloton’s strategy leverages the experience and expertise acquired by Faraone and Murray while at Ontario Teachers’.

Faraone, who joined Ontario Teachers’ in 2002, led investing in consumer, retail and healthcare sectors. He worked on a number of major transactions, such as 24 Hour Fitness, Flynn Restaurant Group and Heartland Dental.

Murray, who joined in 2005, headed Ontario Teachers’ investments in financial services. He participated in such deals as BroadStreet Partners, Canada Guaranty Mortgage Insurance Co and NXT Capital.

Along with leveraging this track record, Peloton will build on the “patient capital story” of Ontario Teachers’, preserving many of its elements but “geared to the mid-market,” Faraone said.

Murray expects the pension system to be among the firm’s deal partners, typically when opportunities “overlap at Ontario Teacher’s low end and our top end.”

Smith, who chairs Peloton, collaborated with Faraone and Murray in launching the firm and designing its strategy.

The veteran Bay Street financier became acquainted with the investment pros during a 10-year working relationship that included partnering in several deals.

For example, Smith invested alongside Ontario Teachers’ in the 2012 acquisition of AIG United Guaranty Mortgage Insurance Co Canada, from AIG. The company, today known as Canada Guaranty, has since grown 30-fold, Murray said.

Peloton’s investment process will be supported by Jim Leech, CEO of Ontario Teachers’ from 2007 to 2013. Leech will chair the firm’s advisory board.

Peloton has begun assembling a team at its Toronto headquarters.

It recently recruited Sam Kogan, previously a senior associate at Onex Corp, as a vice president.