Falconhead exhausts Fund II with dessert deal

The firm is expecting to expand US frozen treat chain Rita’s Italian Ice to warmer climates through the final investment of its $290m second fund.

Falconhead Capital has acquired a controlling stake in Rita’s Water Ice Franchise Company, the parent company of Rita’s Italian Ice, a popular US frozen treat chain. Rita’s, the firm’s first acquisition in 18 months, will be Falconhead’s final acquisition through its second fund, chairman and chief executive officer David Moross told Private Equity International.

The firm will assume control of around 75 percent of Rita’s in the transaction, Moross said. The company’s previous owners, an investment group led by Jim Rudolph, will retain around 25 percent of the company.

Falconhead has installed operating partner Thomas Christopoul as chairman and interim CEO of Rita’s. Rudolph will remain at the company as a vice chairman.

Terms of the deal were not disclosed, but Moross classified the investment as at the “higher end” of typical Falconhead equity commitments, which range from $10 million to $50 million.

Rita’s, which was founded in 1984 outside Philadelphia, operates largely on the eastern seaboard of the US. The company only recently began to expand its franchises beyond the east coast and northeast, a strategy Falconhead expects to further develop.

“We think that the core business, although its 550 units, most of those are in cold weather climates,” Moross said. “Our whole objective is to expand the business beyond the cold weather geographies.”

Falconhead Capital Partners II closed on $290 million in 2007. The fund was generating a 1.2x return multiple and 7.4 percent internal rate of return as of 31 December, 2010, according to documents from the New York City Police Pension Fund. Moross declined to comment on the possibility of the firm raising a third fund.

In 2009, Falconhead was one of several firms that paid money to “settle” their role in a wide-ranging investigation by New York's former Attorney General Andrew Cuomo. According to a statement from Cuomo, HM Capital and Falconhead paid Hank Morris – chief political aide to the state's former comptroller, Alan Hevesi – to obtain investments from New York's massive public pension. The fund committed $70 million to HM Capital, and indirectly committed $30 million to Falconhead through a fund of funds managed by Aldus Equity. Falconhead paid $1.3 million to the state in a settlement.

Falconhead was founded in 1998 and controls around $500 million in aggregate capital commitments, according to its website. The firm typically focuses on operationally intensive control investments in small to lower middle market consumer sector companies.