Q&A on Riverside’s Big Fundraise

Sometimes all you need is a little momentum. That’s one way Riverside Partners pulled off one of the most successful fundraising drives of the year.

When the Boston-based firm entered the market with its fourth fund in March (after some heavy pre-marketing), it was prepared for the worst. But with the help of placement agent Atlantic Pacific Capital, the firm yesterday closed at its hard cap of $400 million in just under eight months (add to that an extra $6 million of GP commitments for the total figure).

I spoke with general partner David Belluck about how his firm went about raising a fully subscribed fund in the bleakest market of the decade.

Your last fund was $225 million. How did you decide on your $325 million target?* Did you have a lot of demand from existing LPs or were you planning to acquire a lot of new investors?

We were thinking about what amount of capital that the team we had built up could invest with the strategy over our investment period. Since our last fund, we’ve built up our team and our investment pace, so we felt that $400 million was a number that if we achieved it, we could invest over 5 year investment period. Our existing LPs were willing to support that.

So, here’s a softball, why did LPs like the fund so much?

Well, we felt fortunate that we were able to raise it so quickly. And that was because of a combination of factors. We have long term track record of 20 years and have had a consistent strategy of healthcare technology sectors, and founder-oriented companies. We’ve had the same four operating partners and have had good returns. Those are elements people were looking for in a fund this year and we were fortunate to have support from the existing investors in fund three. We launched in April, and as Q2 and Q3 wore on, it helped to have the public markets return. By Q3 we found ourselves with quite a bit of momentum.

And what do those returns look like?

I can’t give specific numbers, but historically we’ve generated top quartile returns on funds one and two. Fund 3 is too early to say but the companies are healthy. They survived a very challenging economy and we have strengthened the companies in many ways.

What does your investor base look like this time around? Did many of your investors re-up or do you have a lot of new guys?

One element that helped fundraising is that we went out to a broader set of investors. That included public pension funds for the first time, and we went to Europe for the first time. We also saw a higher level of activity from some funds of funds in Q4 particularly. That complimented the university endowments and foundations we had in fund three. Yale and MIT were still among our lead investors.

Did the new investors come as a result of hiring a placement agent? Had you used Atlantic Pacific in the past?

It was our first time working with them. In 2008, when we were getting ready to organize the fund, we thought we’d have a fast fundraising with tremendous support and raise it all from existing investors. Then you saw what happened in Q4 and Q1 of 2009. Because there was so much uncertainty in economy and investor climate, we decided to look at using a placement agent. So we had an intense fundraising process where we met a lot of folks through Atlantic Pacific.

One trend in 2009 was a shift toward more LP-friendly terms. Did you make any changes in that sense?

We’ve always had fairly standard terms and the terms on this fund were generally similar to prior funds.

The firm has been very active with deals, doing 12 in 2009. Have you spent any of the new fund yet?

Well fund three is fully invested and we used money from fund four on our investment on Vocollect (a voice-assisted work system provider the firm invested in in July).

Will 2010 be more of a year for deal doing or for harvesting portfolio companies?

Fund two is fully realized. Fund three has been generally invested over the last few years so 2010 would probably be a bit early to sell anything. For us, 2010 is much more likely to be a year of investing. It’s impossible to know what pace it will turn out to be but we’re excited about the opportunities we’re seeing and believe there are a lot of investment opportunities out there right now.

Riverside Partners invests in healthcare and technology companies with revenues between $20 -$200 million and with $5 – $25 million of EBITDA.

*We previously reported, incorrectly, that the fund had a $250 million target.