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Sterling Partners shifts to deal-by-deal; healthcare execs to spin out

  • Firm decides to not raise a Fund V
  • Cites changing investment environment
  • Two healthcare execs to spin out

Sterling Partners, a middle-market investment firm, has decided to shift to deal-by-deal from blind-pool investing in the face of tougher competition for deals, while two of its healthcare executives plan to leave to start their own firm.

“We see increased competition weighing on returns, heightened regulatory and tax friction, and less flexibility to operate in what we believe to be the most prudent manner,” Chairman Steven Taslitz wrote in a Jan. 31 investor letter seen by Buyouts.

“The challenges are particularly acute within a fund model for the types of business models we view as our specialty and at times does not align well with a middle-market buyout environment that relies heavily on high levels of leverage to ‘pay up’ in competitive auctions and ultimately to generate returns.”

Taslitz told limited partners that the firm, founded in 1983, has decided to forgo raising a flagship Fund V for now. However, the decision doesn’t preclude the firm from raising blind pools in the future, the letter said. “We see opportunities to develop and enhance bespoke, strategic partnerships which will certainly include blind-pool funds,” Taslitz wrote.

The firm, with offices in Chicago, Baltimore and Miami, plans to finish investing Fund IV, which closed on $917 million in 2013. But after that, Sterling Partners, with some $4.2 billion under management, will be “most effective in an independent, single-deal model, with reduced restrictions,” Taslitz wrote. The firm will deploy its own capital as well as look for opportunities to raise outside capital.

While most of the management team will stay in place, Managing Directors Danny Rosenberg and Garrick Rice will spin out and form their own healthcare-focused firm, the letter said. They will also continue to oversee several healthcare investments for Sterling Partners.

“Danny and Garrick have our full support and sponsorship and we will do everything possible to assist in their success,” the letter said.

Among other changes, Principal Dan Hosler and Managing Director Kim Vender Moffat are considering whether to take on management roles at portfolio companies, the letter said. Moffat was promoted to managing director in November. Principal Brennan Barthelemy, head of human capital, will leave the firm later this year.

A Sterling Partners LP described the departures as “100 percent amicable.”

It’s not clear what role the firm’s recent performance may have played in its decision. A youthful Fund IV was generating a 1.12 total value multiple as of Oct. 31, 2016, according to performance information from New Jersey Division of Investment. Performance information for the third fund could not be found. Another recent development at the firm: Co-founder Eric Becker retired in 2015 after losing his daughter to cancer. He formed family office Caretta Partners.

Taslitz said in a statement to Buyouts that Sterling Partners will be returning to its investment roots by shifting its model to deal-by-deal.

“Sterling Partners was founded over 30 years ago on the premise of investing in differentiated businesses and growing them in inspired ways. My partners and I are excited to announce a return to our investment roots. As we evaluated pursuing a successor to our most recent mid-market buyout fund, it became clear that we prefer the more flexible strategy of raising capital tailored to each individual opportunity. This frees us from many of the restrictions inherent in the traditional fund model and allows us to expand our asset management business in more entrepreneurial ways. We look forward to continuing our long-time tradition of partnering with management teams and business sellers in interesting investment opportunities.”

A spokeswoman declined to comment further.

Secondary process

Meantime, a secondary transaction appears to be underway at Sterling Partners, although it’s not clear what fund or funds it involves. Nor is the structure of the transaction clear.

One source described the process as a GP-led restructuring or tender offer on an older fund that would include a staple — a commitment by the buyer or buyers to new investments.

Sterling Partners closed its fourth fund at $917 million in 2013. It raised just over $1 billion for Fund III in 2007.

Sterling Partners raised $543 million for Fund II, a vintage 2005 vehicle, according to online private equity marketplace Palico, and $317 million for Fund I, a 2002 vintage. The firm also raised $135 million for its first institutional fund, Sterling Venture Partners, in 2000, and $161 million for Sterling Venture Partners II in 2005, Palico said.

The firm collected $254 million for a small-market growth fund in 2009. Most recently, it raised $200 million for a small-market education fund. That fund has one LP, according to the investor letter.

Sterling Partners invests in education, business services and healthcare services. The firm’s managing group includes Taslitz, senior managing director and co-founder; co-founder and Senior Managing Director Chris Hoehn-Saric; Senior Managing Director Rick Elfman; and Managing Directors Alan Macksey and Mike Drai.

As of Dec. 31, 2015, Sterling Partners had about $4.2 billion of assets under management, including about $1.8 billion managed on a non-discretionary basis, according to the firm’s Form ADV.

Action Item: Check out Sterling Partners’ Form ADV:

Photo of Steven Taslitz courtesy of Sterling Partners