Some buyout shops seem susceptible to losing talent to spinout groups.
Around the time Castle Harlan said it was pulling the plug on raising Fund VI in 2015, for example, four executives from the firm, including former Co-President Howard Morgan, emerged as founders of a new New York-based buyout shop called Argand Partners.
The new shop appears to have closed on more than $350 million for its debut fund with help from placement agent MVision Private Equity Advisers, according to a January Form D filing. (In August 2016 Buyouts reported that Castle Harlan was still contemplating raising a new pool of capital.)
In many instances it’s hard to pinpoint a cause, as in the case of spinouts over the years from such firms as Apollo Global Management (Ares Management, Gamut Capital Management). Maybe the explanation is the obvious one: Apollo and other firms do such a good job of hiring and scaling that they inevitably bring on entrepreneurial souls with the ambition to start something new.
Institutional investors have been getting to know two firms that have recently spun out of Lincolnshire Management, the 32-year-old mid-market buyout shop based in New York with more than $1.7 billion under management (see accompanying table). Lincolnshire closed its latest fund, its fourth, in 2008 at $835 million.
Hilltop Private Capital, based in New York and founded in 2016, counts Lincolnshire alum Katherine (Kate) Lehman as a co-founder and managing partner, while Partner and origination specialist Edwin Moss had previously headed up the Los Angeles office of Lincolnshire.
The firm, which has been raising money on a deal by deal basis, has talked with investors about the possibility of raising a $225 million debut fund to pursue small buyouts, according to a source familiar with the effort.
Gainline Capital Partners, based in Stamford, Connecticut, and founded in 2015, counts at least four Lincolnshire alums on its payroll, including Co-Founders Allan Weinstein and Rick Sullivan.
The firm is out seeking $250 million with the help of placement agent Lazard Freres & Co, according to our source. It has raised at least $66.3 million of that target for its debut fund from 14 investors, according to a Form D filing this December; I was unable to reach executives at the firm for comment.
More than a dozen years ago, in 2005, at least three Lincolnshire executives left to co-found New York-based Corinthian Capital. A Form D filed in March 2016 suggests the firm had raised at least $130.4 million of a targeted $250 million for Corinthian Equity Fund II LP. It used Park Hill Group as placement agent. An executive at Corinthian declined to comment for this story.
It is not clear what these spinouts signal about Lincolnshire Management, if anything. The firm has its share of hiccups in recent years. Its latest fund hasn’t performed as well as its previous two.
According to backer Teachers’ Retirement System of the City of New York, its investment in Fund IV had generated an IRR of 9.3 percent as of June 30, underperforming the pension fund’s benchmark PME (public market equivalent) by 4.5 percentage points.
By contrast, its investment in the vintage 2004 Fund III has generated a 29.4 percent IRR, beating its benchmark PME by 18.3 percentage points, and its investment in the vintage 1999 Fund II has generated a 24.6 percent IRR, beating its benchmark by 17.6 percentage points.
The firm’s reputation also took a hit in 2014 when it reached a $2.3 million settlement with the SEC related to the allocation of portfolio-company expenses between two funds. Lincolnshire neither admitted nor denied the charges.
I wasn’t able to reach executives at Lincolnshire Management for comment on its fundraising plans. In an October 2016 story in Buyouts, Lincolnshire CEO T.J. Maloney was quoted in an email as writing that the firm is “working on a number of realizations at the moment and when they are complete, we will come to market.”
Action Item: Read the Gainline Form D at https://goo.gl/Eyx1rT.
Image of Sherlock Holmes courtesy Ostill/iStock/Getty Images
Correction: The original version of this story said it was clear why Castle Harlan lost talent to a spin-out. But it is not.