RLJ Equity Partners, led by Robert Johnson, the billionaire founder of Black Entertainment Television, is on its way to raising a second fund, having secured $103 million in a June first closing.
Those re-upping from among the 12 debut-fund backers include Boeing; GE Asset Management, acquired last year by State Street; Muller & Monroe Asset Management and Fairview Capital. New investors Chicago Teachers’ Pension Fund and Madison Capital also climbed aboard. The firm has set a target of $300 million and hard cap of $400 million on RLJ Equity Partners II LP. As with the debut fund, the firm intends to offer investors co-investment opportunities.
Managing Director Jerry Johnson told me that while he expects re-upping investors to get the firm close to the finish line, RLJ Equity may hire a placement agent to work on the final stretch of marketing. The firm expects to complete the fund by year-end.
To its fundraising pitch RLJ Equity brings a patient approach to investing, a solid track record, and a strategy that’s geographically narrower than it was on its $230 million, vintage-2007 debut fund.
The Bethesda, Maryland, buyout shop didn’t dip into that fund for its first platform deal until late 2009. And it was just a few weeks ago that the firm said it had acquired the first platform from its second fund. The firm teamed with independent sponsor SJ Partners to buy Native Maine Produce & Specialty Foods, a distributor of fresh food to more than 1,000 restaurants across New England.
But a methodical approach to deal-making — the firm aims for three to four deals per year — lets RLJ stay disciplined on price.
“We could invest a fund in a year if we wanted to pay 14x for everything,” said Jerry Johnson. “We have a very steady pace, and we’re focused on buying companies at a good value.” The firm paid an average purchase-price multiple of just 6.6x on deals from 2009-2015, compared with the 8.6x that it estimates as the average across the industry during that time.
Johnson said the firm paid less than 6.6x for Native Maine, a proprietary deal sourced by SJ Partners founder and CEO Scott Johnson. (Robert, Jerry and Scott Johnson are not related.)
All told RLJ Equity has sold four of its first 12 companies, returning more than 90 percent of invested capital. The remaining eight are “all doing very well” and three are for sale, said Jerry Johnson.
According to investor Teachers’ Retirement System of New York City, the debut fund as of June 30 had generated a 1.69x investment multiple and IRR of 14.53 percent, beating its Russell-3000-based benchmark by 136 basis points. (Johnson called those conservative figures since they don’t include a recent exit done at a higher-than-holding valuation.) For comparison, all domestic vintage-2007 buyout and turnaround funds in the Buyouts database generated a bottom-quartile IRR of 6.3 percent, median IRR of 11.1 percent and a top-quartile IRR of 16.2 percent.
RLJ Equity invests $15 million to $40 million at a time to buy companies valued at $50 million to $250 million in four main areas — business services, aerospace, logistics and specialty manufacturing.
When it was founded in 2006, RLJ Equity set its sights on a global strategy. It struck a partnership with Carlyle Group, selling a 20 percent stake in its management company with the idea of partnering on mid-market deals outside the United States.
The two firms ended up doing three international deals together, with RLJ Equity typically taking a 5 percent state in the companies. But according to Johnson the firm decided with its second fund to focus 100 percent on control buyouts in the United States. And owner Robert Johnson late last year purchased back the 20 percent stake from Carlyle, said Jerry Johnson.
RLJ Equity promotes a number of unique strengths on the fundraising trail. These include a high-powered, nine-member executive network that brings expertise and connections to bear on deal-sourcing and improving the performance of portfolio companies. Members include Dale Jones, former vice chairman of executive recruiter Heidrick & Struggles; Harriet Michel, former president of the National Minority Supplier Development Council; and Lisa Wardell, president & CEO of DeVry Education Group.
The firm also started what it calls a founder focus solutions group to cold-call company founders to see if they’re seeking partners or the opportunity to sell. The firm aims to have at least a third of its deals sourced through proprietary channels or through limited auctions. As part of its first-100-day plan for Native Maine, RLJ Equity has identified potential add-ons and is negotiating with at least one seller.
An early add-on played a role in RLJ Equity’s most lucrative deal to date. Within six months of its 2014 purchase of MarketCast, a provider of data analytics to film and entertainment companies, the firm picked up an acquisition that added about $1 million in EBITDA to the company. All told during its two-year ownership the company’s EBITDA rose to more than $16 million from between $9 million and $10 million, mostly through organic growth, Johnson said.
On its sale of the company late last year to Kohlberg & Co, for a purchase multiple three turns higher than it paid, RLJ Equity had made 2.8 times its money and generated a 66 percent gross IRR.
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