Why Is Castle Harlan’s Fund Less Than Halfway After 14 Months?

More than a year into fundraising for its fifth vehicle, Castle Harlan is less than halfway to its $1.5 billion target, peHUB has learned.

The fund, Castle Harlan V, began its pre-marketing as early as September of 2007, according to industry reports. It was officially formed in December of 2007, and launched fundraising in early 2008. The fund has gathered $684 million worth of commitments from at least 34 investors, according to a source familiar with the situation. The firm declined to comment.

I realize LPs are cash-strapped and it’s a difficult fundraising environment. But despite market conditions, funds continue to be raised. Yet Castle Harlan, an established middle market firm, is only halfway to its goal after 14 months in the market. It can’t be as simple as “bad market conditions.” The fund isn’t much of a jump over Castle Harlan’s last fund, so the firm would have $1.2 billion if everyone simply re-upped at the same level!

It’s surprising to me that the firm has been in the market for this long. Performance on Castle Harlan’s prior funds is satisfactory. To date, Castle Harlan Partners IV, a 2002 vintage, has posted a 22.8% IRR and a 1.46 return according to the most recent data from Oregon Public Employees Retirement Fund. The pension plan committed $100 million to the fund; $88.4 million of it had been drawn as of the report.

Taking a closer look at Castle Harlan Partners IV, it seems that fund has plenty of big wins to balance out a few potential stains on the portfolio.

According to a story by Bernard Vaughan of Buyouts, the fund has yielded five impressive exits, while four of its remaining eight portfolio companies are on S&P’s Weakest Links list.

The strong exits are:
AmeriCast Technologies earned a 3x return and 90% IRR.
Austar United Communications Limited earned a 7.2x return with a 134% IRR.
Horizon Lines Holding Corp earned a 3.2x return and a 116% IRR.
PolyPipe Group earned a 4.5x return return and a 160% IRR.
RathGibson Inc. earned a 2.6x return a 105% IRR.

The Weakest Links Companies (according to Standard & Poor’s) are:
Ames True Temper has a rating of “CCC+” with a stable outlook.
Baker & Taylor has a “B” rating and a stable outlook.
Caribbean Restaurants has a “B-” raiting with a negative outlook.
Perkins & Marie Callender’s has a “B-“ rating with a negative outlook.

The remaining companies are:
Advanced Accessory Systems
Anchor Drilling Fluids USA Inc.
Bravo Development Inc.
United Malt Holdings

So it’s a mixed bag, and not bad enough, in my opinion, to hamper a firm’s future fundraising efforts. To date, fund four has even beat its prior funds in performance. According to Oregon PERS, The firm’s third fund has made a slightly lower 1.16 return and a 4.2% IRR and its second fund returned 1.67x its money with a 27.1% IRR.

On top of its performance, Castle Harlan is not some emerging manager no one’s heard of. The firm has been investing in middle market companies since 1987. John Castle, the former head of Donaldson, Lufkin & Jenrette, was even awarded a lifetime achievement award from M&A Advisor last year.

I can’t imagine LPs are hesitant over succession issues either. John Castle is 65 years old, but Justin Wender, the firm’s President, has been with the firm since 1993 and is only 40, according to this BusinessWeek profile.

So that’s a long way of saying, I don’t know why Castle Harlan’s fifth fund has only gathered half of its target to date. If you have any ideas, add ‘em in the comments.