The chase for complex, special-situation deals is heating up.
Last month Dallas-based Renovo Capital finished raising its second institutionally backed turnaround and special-situations fund at its hard cap of $225 million. Among the 10 investors is the corporate pension plan of DuPont. The firm raised $132 million for its first institutional fund — its second overall — back in 2014.
Renovo Capital’s fundraise follows that of Santa Monica, California-based Balmoral Funds, which last year wrapped up Balmoral Special Situations Fund III LP with $200 million in commitments. The two firms employ similar investment strategies, although the partners at Balmoral Funds have an appetite for retail, an area that Renovo Capital avoids.
Among new players on the special-situations scene are Boca Raton, Florida-based Hidden Harbor Capital Partners, which last month closed a debut fund at just over $265 million earmarked for underperforming companies; and Chicago-based Center Rock Capital Partners, which last year closed a debut fund of $580 million earmarked for complex transactions. Its founders came from Wynnchurch Capital.
New York-based 5P Investment Partners LLC, run by ex-executives of investment bank Rothschild Inc, last spring launched quietly as an independent sponsor to pursue special situations on a deal-by-deal basis in the small and middle markets. Depending on market conditions, the firm also may explore raising a separate vehicle earmarked for debtor-in-possession loans, rescue loans, Section 363 sales, and other opportunities in pre-bankruptcy and bankruptcy situations.
The term “special situations” means different things to different investors. During boom times, such firms go after complex situations that may or may not involve distress. They may pluck out a healthy division from a public company in need of cash, come to the rescue of an overlevered but ultimately strong business, or dive into the books of a family-run business where the financial documentation is suboptimal.
During recessions special-situations firms may pivot to invest more regularly in companies bleeding red ink as sources of credit grow scarce. While few people anticipate an imminent recession, a source familiar with the turnaround market said investors are beginning to see opportunities to invest in companies hurt by rising costs related to steel tariffs.
Hidden Harbor Managing Partner John Caple said he believes his firm has just 20-25 rivals competing for a robust flow of opportunities. “We’re always shocked at how seldom we truly compete with each other over a deal,” Caple said. “There are just so many deals in this space.”
Founded in the latter part of 2008 just as the financial crisis took hold, Renovo Capital has recently been focusing on complex situations. These included the early 2017 purchase of a background screening business from a then-distressed public company, Patriot National (which filed for Chapter 11 bankruptcy protection in early 2018). Last summer the company, Global HR Research, completed the add-on acquisition of easyBackgrounds.
All told, Renovo Capital, which has a second office in Denver, lists six platform companies on its website. The firm tends to invest $10 million to $500 million in North American manufacturing, business services, energy services, technology and e-commerce companies generating revenue of $20 million to $200 million.
Balmoral Funds, according to its website, invests $5 million to $30 million of equity in North American companies that generate $30 million to $300 million in revenue (or did so during peak times over the past decade). The firm is industry-agnostic but avoids early-stage technology, financial services and “pure” real estate investments. The firm describes itself as “experienced in pursuing investment opportunities involving complex operational or financial challenges.”
The firm’s website lists 11 portfolio companies, including Dispatch Transportation, a dump-truck and dirt-hauling company acquired in late 2011. The firm was in the news earlier this month for portfolio company Enesco LLC’s plan to acquire some of the assets of Things Remembered, a mall-based retailer that filed for Chapter 11 bankruptcy. Executives at Balmoral Funds, founded in 2005, were unavailable for comment.
Perhaps the most under-the-radar new firm on the special-situations scene is 5P Investment Partners, which plans to invest in companies operating in manufacturing, industrials, distribution, logistics, specialty finance, financial services and oil and gas. As an independent sponsor the firm intends to write checks of $25 million to $100 million, although with the help of co-investors it can bankroll even larger deals. As a distressed investor the firm may provide a DIP loan as small as $5 million to get its foot into the door of a company. (Like Renovo Capital, 5P Investment Partners plans to avoid retail.)
The founding partners of 5P Investment Partners include Chief Investment Officer David Storper, who from 1996 to 2012 worked at Rothschild and WL Ross & Co; and Gregory Lamb, who worked at the same firms from 1996 to 2009. A third partner and investment banker, Ian Fay, was an associate at Rothschild in the late 1990s and more recently has experience advising midsized companies in the oil-and-gas sector.
Action Item: Learn more about 5P Investment Partners from the LinkedIn profile of Gregory Lamb.
Correction: 5P Investment Partners was referred to as 5P Investments in a single reference in the original version of this column.