Update: Sterling Partners Raising Co-Invest; Side Fund On Hold

(Adds details on timing, clarifies size)

Sterling Partners of Northbrook, Ill., and Baltimore has set aside its plans to raise a $500 million side fund, sources familiar with the situation said. The side fund would have supplemented Sterling’s $1 billion fifth fund, called SCP III. That pool of capital closed in June 2007.

The firm postponed fundraising for its side fund in favor of a co-investment for one deal of an undisclosed size, sources said. The reason is simple: Sterling Investment Partners has a deal that it wants to do, and fast.

“The primary driver of the sidecar was a flurry of investment opportunities that came all at once,” a source said. “One of those investments has accelerated in its timing and we knew it’d be faster to raise co-investments.” Sterling is tapping LPs of SCP III for the effort, and a number of outside investors who’ve expressed interest if there is availability, the source said. The outside investors who don’t get a piece of the co-invest may have a shot at the side fund, as the source assured me, “It’s not dead.” The source added, “Timing is what’s driving the co-investment.”

Sterling told its investors of the change last week. Right now LPs are waiting for further details on the size and minimum investments for the co-invest.

Though I couldn’t find any return figures on Sterling’s prior funds, a second source assured me, “they will have no problem raising the money.” Sterling posted an exit in May, selling Atlantic Industrial to Lindsay Goldberg for more than $250 million.

The firm invests in education, health care, direct marketing, business services, specialty manufacturing and technology. Funds of Funds manager SL Capital has invested in Sterling Partners funds, according to LBO Wire.

Clarification: A prior version of this story incorrectly identified the co-investment deal as a “fund.”