Big LPs back micro-cap fund

Private equity firm The Riverside Company has closed its new micro-cap fund on $250m, far above its target, and is pursuing an aggressive small-company investment strategy.

The Riverside Company, a Cleveland-based private equity firm, announced the closing of its Riverside Micro-Cap Fund on $250 million (€197.3 million), more than 67 percent above its target of $150 million, and is already in the midst of an acquisition spree at the low end of the middle market.

Investors in the micro-cap fund include clients of Massachusetts-based Meketa Investment Group, State of Michigan Retirement Systems, Dutch investment firm AlpInvest Partners, Menlo Park-based Makena Capital Holdings, RCP Advisors in Chicago, and Credit Suisse’s Ohio Public Employee Retirement System/Ohio Midwest Fund.

The fund is aimed at acquiring micro-cap companies, defined by Riverside as enterprises with revenues in the $5 million to $25 million range, with EBITDA of $3 million or less. In order to turn a profit of more than $10 million, the companies will remain in the Riverside portfolio for seven to 10 years, considerably longer than most private equity investments. The investments will be very hands-on, with “active operating involvement, add-on acquisitions and high organic growth,” said Riverside co-CEO Béla Szigethy in a statement.

The micro-cap fund is a departure from the firm’s much larger $750 million (€592 million) Riverside Capital Appreciation Fund. Loren Schlachet, a partner at Riverside and the manager of the new fund, explained the firm’s thinking in an interview with PrivateEquityOnline in July: “Oftentimes companies with just $1 [million] or $2 million of EBIDTA [would become available], which were very attractive acquisition targets but too small given the size of our fund. What we opted to do was develop a new fund, and a new strategy to acquire these sorts of companies.”

Riverside co-CEO Stewart Kohl, in a statement, called the strategy an “opportunity to pan for golden nuggets and to refine and shape them into valuable ingots.”

The fund has already acquired eight companies since July 2005, including promotional material maker Adventures in Advertising, directory publisher LocalTel and healthcare mail-order business ActivStyle. The company said it would announce its ninth acquisition before the end of September.