Riverside Co. said Wednesday that is has closed its second micro-cap fund at $137 million, which is 37% above its $100 million target. The pool, Riverside Micro-Cap Fund II, is a small business investment company fund. RMCF II will invest in companies with under $5 million in EBITDA.
The Riverside Micro-Cap Fund II (RMCF II) has bucked a continued challenging fundraising market to close at $137 million in commitments, 37% above the fund’s target of $100 million. Many new investors joined the fold alongside existing Riverside Company faithful to take part in its first Small Business Investment Company (SBIC) fund.
As an SBIC fund, RMCF II enjoys access to low-interest rate debt from the U.S. government’s Small Business Administration (SBA). Through this SBA element, RMCF II can add up to $150 million in capital, providing RMCF II with a total of $287 million to invest in control positions in exceptional smaller companies.
RMCF II follows in the footsteps of 2005 vintage RMCF I, which is a top-decile fund per Thomson Venture Economics benchmarks. RMCF II will continue to apply the proven RMCF approach of buying fast-growing companies with under $5 million in EBITDA and then supercharging returns by beefing up management, improving processes, expanding to new markets, broadening customer bases and completing strategic add-on acquisitions. RMCF II will exclusively purchase U.S.-based companies.
“We love these fast-growing, innovative smaller companies. We want to take these gems into our jewelry shop and design and shine them to a previously unimaginable brilliance,” said Riverside Co-CEO Béla Szigethy. “But finding financing for them is a real challenge. So the SBIC, with its inexpensive and patient capital, is a made-in-heaven solution for us. The SBIC program has been around since 1958 and has proven results. It’s been a pleasure to work with the SBA through the licensure process. We look forward to using this war chest to buy and build a dozen or more of the best small companies in America.”
Despite the success of RMCF I, fundraising for RMCF II was a challenge.
“I can’t say I expected fundraising to be a breeze, but given the track record of our RMCF team and Riverside’s 23 years of experience, I did not expect to face so many headwinds,” said Riverside Co-CEO Stewart Kohl. “Back in 2005 to 2007, it was too easy to raise a fund. Now it’s too hard. It’s a slow-motion shakeout of the industry, and access to capital will determine which funds survive. We’ve raised almost $2 billion in capital in the tougher environment of the last three years, so we are confident that we’ll be at the top of the heap after this financial version of ‘Night of the Living Dead.’”
Kohl added that RMCF’s inherently longer investment window and the unique SBIC structure required some additional explaining and didn’t suit every LP.
“Even with the challenges, we beat our target by almost 40%, and early signs from RMCF II are very positive,” said Kohl. “Given the strength and experience of the RMCF team, we expect great things from this fund. We’ve built an operating-intensive model that proved itself in the crucible of the Great Recession, when RMCF I’s portfolio actually increased revenues and EBITDA.”
RMCF II drew many repeat Riverside investors – 62% of its commitments are from existing investors – but it also attracted a substantial number of new faces. Select new and returning investors include:
BMO Harris Bank N.A.
The Cleveland Foundation
Key Community Development Corporation
State of Michigan Retirement System
Riverside conducts its buy-and-build investment strategy via four fund families. Two funds focus on North American opportunities while one concentrates on Europe and another invests in the developed economies of the Asia-Pacific region. The firm’s investors have enjoyed consistently superior returns across more than 60 exits in Riverside’s history.
“Our overall strategy at the smaller end of the middle market has been consistent throughout our history,” said Szigethy. “We’ve never chased bigger companies, preferring instead to get better in our little niche. We’re especially proud of our trailblazing work in the micro space.”
The RMCF team is led by Co-Fund Managers Loren Schlachet and Ron Sansom. Their strong team has helped RMCF not only weather the Global Financial Crisis, but also increasing EBITDA each and every year.
The employees of Riverside regularly commit at least 5% of each fund, representing a significant portion of their net worth. In the case of RMCF II, that commitment was 10%.
The Riverside Company
The Riverside Company is a global private equity firm focused on acquiring growing enterprises valued at up to $200 million (€200 million in Europe). The firm partners with strong management teams and enhances its investments through acquisitions and organic growth. Since its founding in 1988, Riverside has invested in more than 260 transactions with a total enterprise value of more than $5.4 billion/€4.4 billion. The firm’s portfolio in North America, Europe and the Asia Pacific region includes more than 75 companies with roughly 14,000 employees. Riverside completes acquisitions smoothly thanks to $3.4 billion/€2.7 billion in assets under management, more than 200 professionals in 20 offices, and longstanding relationships with partner lenders.