Perhaps no time in the history of the asset class have more investors said they have an appetite for funds run by emerging managers.
Testing that demand in coming months will be Aldrich Capital Partners, Argand Partners and Soundcore Capital Partners. All three are either in the market with debut funds or expected to be by next year. Those in the market with second funds include Southfield Capital, which earlier this month hit $75 million toward the $175 million target with backing from funds-of-funds manager Siguler Guff ($36 million); Stonington Capital Advisors is the placement agent on the fund.
The infusion of fresh blood into the market plays an important role in the asset class. As more established firms grow picky about who backs them, emerging managers give investors a chance to invest with the top firms of the future before they’re widely known. By gravitating to unexploited niches in the market, emerging-manager funds also help investors diversify their private equity portfolios.
Founded in 2014, Aldrich Capital has set a target of $250 million for its debut growth equity fund. Placement agent Hycroft began to market the opportunity about six months ago.
The firm has two co-founders. Mirza Baig has been a serial entrepreneur in health and technology, co-founding three companies, Imaging Advantage, Legal Advantage and Tech Fetch. Earlier he served as CFO of the eCommerce group at AOL Time Warner. Raheel Zia had been managing director in the principal investment division of Goldman, Sachs & Co. From his office in San Francisco Zia helped get the growth equity investment practice off the ground.
Aldrich Capital plans to invest in profitable, cash-flow-positive companies generating at least $10 million in revenue in such sectors as financial technology, healthcare IT, software and tech-enabled services. Early portfolio companies include Lavu, which makes a restaurant point-of-sale system for the iPad, and PhishMe, whose products are intended to help companies combat phishing attacks. Executives at Aldrich Capital weren’t immediately available for comment.
Argand Partners, whose core team spun out of Castle Harlan last year, appears to be in the market with a first-time fund, based on a Form D filed in January for Argand Partners Fund LP. The filing does not reveal a target for the fund. It does list MVision Private Equity Advisers USA LLC and Magog & Cie Ltd as firms entitled to sales commissions. An executive at the firm declined to comment on the fundraise.
Four ex-Castle Harlan executives who took early roles at Argand Partners include Howard Morgan, partner and senior managing director; Heather Faust and Tariq Osman, partners and managing directors; and Hemali Dassani, director of investor relations and chief compliance officer. The firm plans to take controlling interests in mid-market companies in industrial, industrial-related energy and consumer products. Look for target companies to have enterprise values of $100 million to $500 million.
Soundcore Capital, founded about a year ago by ex-Sun Capital investment professional Jarrett Turner, is expected to hit the market with its debut fund toward the latter half of next year, seeking in the range of $250 million to $400 million.
Until then the firm plans to continue to raise separate special-purpose funds to house each of its portfolio companies. In November the firm acquired its first platform, Alloy Wheel Repair Specialists, subsequently closed seven add-on acquisitions, and identified five more expected to close soon, according to Turner. In addition to investing $20 million to $30 million in equity, the firm recently lined up a $42.5 million credit facility from Monroe Capital to finance additional acquisitions.
Turner said the firm has identified at least two other platform targets, one expected to need an equity check of about $35 million to close, the other in the $50 million to $60 million range.
Backing for Alloy Wheel Repair Specialists came from 19 investors, including funds of funds, family offices and a law firm that has handled legal work for the firm. Turner said the firm expects by year-end to recapitalize Alloy Wheel Repair Specialists to return to investors a dividend equal to at least their contributed capital.
As a general rule Soundcore Capital seeks to invest $10 million to $50 million toward the acquisition of platform companies generating $3 million to $15 million of Ebitda. It targets services, specialty distribution and value-added manufacturing companies based in the United States and Canada. The firm places as many as 300 calls a week to identify acquisition targets and sidestep auctions.
Turner said that the firm’s method of deal sourcing and its plan to offer co-investment opportunities have both resonated with investors in early meetings about the debut fund. “They like the hard work and hustle that we’re doing,” he said. “We’re giving them access to companies that no one else can give them access to.”
Prior to founding Soundcore Capital Turner had been senior manager of investments with Sumitomo Corp of America’s private equity division from 2013 to 2015. Before that he worked on acquisitions and related deals as a senior associate at Sun Capital Partners. It was there that Turner and partner Feliks Zarotsky first started talking about launching their own fund. Zarotsky left Sun Capital as a senior associate in 2013 to join mid-market buyout shop as vice president of Tower Three Partners before joining Soundcore Capital earlier this year.
Turner said he always knew he wanted to start his own firm. He and Zarotsky believe in one another, he said, and believe that they can outperform other buyout shops. “We wanted the opportunity to drive the future for ourselves,” he said.
Action Item: Get the Argand Form D filing at http://goo.gl/wzwXPm