RFE Investment Partners returns to market with new SBIC fund

  • New fund to raise $200 mln from LPs, $150 mln from the Small Business Administration
  • Fund IX will mark RFE’s first SBIC fund since its 1998 vintage
  • RFE is led by Jim Parsons and Michael Foster

RFE Investment Partners set a $300 million target for its ninth flagship fund fund, which the firm plans to structure as a small business investment company, according to documents from Connecticut Office of the State Treasurer.

RFE Investment Partners IX has a $350 million hard cap.

Connecticut Treasurer Denise Nappier, trustee of the state’s retirement assets, is considering committing up to $40 million to Fund IX.

The firm will likely raise around $200 million from its limited partners, with the remaining $150 million coming in the form of leverage provided by the U.S. Small Business Administration’s SBIC program.

Certain lower-mid-market firms are eligible to receive low-rate financing provided by the SBA, boosting the amount of capital their funds can deploy.

RFE IX is slated to hold a first close around the end of Q2 or early in Q3, a StepStone Group memo prepared for Connecticut showed.

RFE, New Canaan, plans to use Fund IX for buy-and-build investments in lower-middle-market companies. The typical RFE portfolio company is usually founder-owned and generates $5 million to $10 million of Ebitda.

The firm previously used its funds for growth-capital and venture-capital investments as well, though it later determined that the bulk of its success came from buyouts, the memos released by Connecticut said.

“A commitment to Fund IX is a compelling opportunity to continue a relationship with a manager who has successfully executed a buy-and-build strategy in the lower middle market,” StepStone wrote.

“RFE benefits from a cohesive and experienced team, with a value-oriented strategy that has been refined since Fund VII to exclusively focus on buyout transactions.”

The firm’s previous SBIC fund, which it raised in 1998, was netting a 15.1 percent internal rate of return as of Dec. 31, a fund presentation said. Funds VII and VIII, which were not structured as SBICs, were netting IRRs of 8.6 percent and 9 percent respectively as of that date.

RFE is charging LPs a 2 percent annual management fee on committed capital plus SBIC leverage during the fund’s investment period, according to the StepStone memo. The fee falls to 1.5 percent of invested capital afterward.

The firm will take 20 percent of Fund IX’s profits as carried interest, over an 8 percent return hurdle.

RFE was founded in 1979. The firm is led by Senior Managing Directors Jim Parsons and Michael Foster.

RFE declined comment.

Action Item: For more on RFE, visit http://rfeip.com/