In mid-November, Gryphon Investors held a final close on its Gryphon IV mid-market fund on its $1.1 billion hard-cap, significantly above its $600 million target and original cap of $875 million.
“We launched in June 2015 with an original cap of $875 million, but given the strong productivity of our firm for the third year in a row and having already more than $400 million invested in five transactions, our limited partners quickly agreed coming out of this Labor Day to raise the hard-cap to $1.1 billion,” David Andrews, founder and chief executive at Gryphon Investors, told Private Equity International.
Gryphon IV follows Gryphon 3.5, a half fund that San Francisco-based Gryphon raised in 2013 as a bridge on the heels of the financial crisis. Gryphon 3.5 was quickly invested in seven companies, the last of these having its investment evenly shared by the two funds.
PEI spoke to Andrews about fundraising Gryphon IV and how Gryphon 3.5 has fared so far. The following is an excerpt from our conversation.
PEI understands that most investors from Gryphon 3.5 returned for this new fund, but how were you able to diversify your roster of investors?
We had approximately 80 percent of investors from 3.5 invested in Gryphon IV and the average institutional investor increased its commitment by over 200 percent. We also had a goal of achieving geographic diversity, and we were able as a result to have about a third of our LPs from outside the United States. We have investors from Europe, the Middle East, Asia and Latin America. Historically we've predominantly had US-based LPs.
In Europe, we were able to respond to reverse solicitations. We found 2016 has been a very good year for European pension funds looking for lower and mid-market firms. We had a lot of inquiries. Some actually began in 2015 and they can take longer than the average US-based processes. We were able to wait for some of them, until our 15 November final closing day
The most pleasant surprise was in Asia, where we were able to secure four different institutional investors for the first time. We first met a few of these parties when we were raising Gryphon 3.5. That fundraise went very fast, but they were really interested early in Gryphon IV.
In hindsight, how has Gryphon 3.5 worked out for the firm?
We think it was a fairly creative solution to an unfortunate problem, not of our own making, coming out of the Great Recession. Namely, even though Gryphon III had top-quartile returns, a significant number of our largest LPs were disproportionally harmed by or had regulatory constraints that prevented them from making commitments to a new fund. So rather than to have to spend over two years fundraising to achieve a $600 million fund then, we said let's raise half of the fund and do it at the time that we pick. It was a very efficient fundraise
How do Gryphon IV's terms differ from predecessor vehicles?
Terms are similar to previous funds, with the significant exception being that we have a modified European waterfall, which allows us as a mid-market firm to distribute carry as our fund is performing strongly rather than having to wait until all of the investments are returned, which our LPs agree is an important attribute of compensating our team, as long as we are performing well.
Gryphon III was an American waterfall. Gryphon 3.5 was a European waterfall when the fundraising market was more difficult, but also because it didn't really matter to us in Gryphon 3.5. It was a half-size fund and we were very confident that the first two or three deals would return the whole fund. In fact, Gryphon 3.5's first two exits of Trinity Consultants and K&N Engineering were completed in 2015 and 2016, respectively, and have returned all of the capital of Gryphon 3.5, so the fund owns the five remaining companies essentially for free.
How do you approach co-investments in this new fund?
A significant number of our LPs are active co-investors and we provide co-investments on a deal-by-deal basis based on both the nature of the transaction and how it would fit with the strategies of specific LPs. Also, we try our best to rotate opportunities to treat our LPs equitably. We don't charge any fees. Three of the five deals in Gryphon IV have significant co-investors
With a large portion of Gryphon IV already invested, when do you anticipate returning to the fundraising trail?
Over 40 percent of the fund is already invested and over 50 percent is committed. We expect this fund to last us until early 2018. Our LPs saw the fund cap raise as providing a year and a half before we would need to be in fundraising again, assuming market conditions stay about the same.
We're thinking the last couple of deals in Gryphon IV would be 2018 vintage investments. Our LPs feel the expansion is likely to add an additional vintage year by investing in two to three more portfolio companies and also putting us into a more normal fundraising cycle.