S.F. Shop Closes F-o-F Below Target But Grows Emerging Mandate

Bay Hills Capital may have closed its debut fund of funds below the original target but the San Francisco-based shop is already in rally mode, scoring an additional $50 million mandate from the Kentucky Retirement Systems to boost the limited partner’s support of emerging managers.

And if that wasn’t enough, Lance Mansbridge, managing director and co-founder of Bay Hills Capital, told Buyouts the firm plans to start raising Fund II in the second quarter of 2009, hoping to secure $125 million.

The firm held its final close of Bay Hills Capital Partners I in December with $58 million, well beneath the original target of $100 million. It plans to invest in eight to 12 funds with sizes ranging from $100 million to $1 billion through the pool. Within its focus on smaller buyout partnerships, Bay Hills Capital is seeking a diversified mix of investment strategy, industry exposure and geography. Backers include Denison University Endowment; a large Bay Area non-profit trust; and family offices.

Bay Hills Capital has already made pledges from the fund to Arbor Investment Partners II, a $125 million vehicle of Arbor Private Investment Co., which acquires food and beverage companies; HIG Capital Partners IV, a $750 million pool through which HIG Capital buys small and medium-sized companies in manufacturing and services; Housatonic Partners, which focuses on buyouts or recaps of small- to mid-sized media and communications companies; and Huron Capital Partners’s The Huron Fund III, which closed on $350 million in 2008 for niche manufacturing, distribution and service company investments.

The additional $50 million mandate from Kentucky Retirement follows the original $75 million commitment to Bay Hills Capital for the emerging manager program that the LP made in late 2007. The pledge is to be used in 2009, and there is the potential for another $50 million mandate for 2010. The $15.5 billion pension fund established its emerging manager program to access the smaller end of the private equity market and act as a conduit into the core fund.

Mansbridge defines emerging managers as new teams of experienced managers raising their first or second funds. Third-time funds are considered as long as the prior funds were not institutional. Mansbridge intends to commit the $50 million to eight U.S. and Canadian emerging managers, starting at the end of the first quarter. To make his selection, he plans to meet with more than 100 managers this year.

Receiving backing from the original $75 million mandate were California-based Marlin Equity Partners, which takes controlling interests in businesses experiencing different levels of operational, financial or market-driven changes; California-based Accel-KKR, which takes majority stakes in mid-market technology companies with annual revenue between $15 million and $150 million; and Toronto-based Callisto Capital, which makes control investments and takes minority interests in private and public companies.