HM Capital spin-out gets CPPIB support(2)

Kainos Capital, a spin-out from HM Capital, is on a steady track toward the $400 million target for its debut fund, and recently got a little help from a big friend.

Kainos, formed by a group of executives from HM Capital that is in the process of winding down, has raised close to $270 million for its debut fund and will be holding a second close soon, according to a person with knowledge of the firm.

In November, the Dallas Fire and Police Pension System committed $35 million to the fund, pending final negotiations. Dallas Fire and Police also was an investor in HM Capital’s fund. HM Capital spun out from Hicks Muse Tate & Furst after that firm was battered by bad telecom investments in the late 1990s and started to wind down.

Andrew Rosen

Kainos got a big boost with a more than $100 million commitment from the Canada Pension Plan Investment Board, which also is helping the firm complete its spin-out, according to market sources. CPPIB is buying stakes in three portfolio companies from HM Capital’s 2006 Sector Performance Fund, sources said. Those companies will continue to be managed by the Kainos team, led by managing partner Andrew Rosen and partner Robert Sperry, both of whom specialised in the food and consumer products sector at HM Capital, and partner Sarah Bradley, who joined HM Capital in 2011 and also has food and consumer goods experience in her background.

Existing HM Capital limited partners have the option to roll over their stakes into the new fund or cash out, according to one source with knowledge of the deal.

Kainos and CPPIB declined to comment. Dow Jones reported on the CPPIB transaction last month.

The firm has a specific investment strategy for its debut fund, which launched last year, focusing on the US food and consumer mid-market sector. Kainos has worked to convince LPs that the food and consumer group at HM Capital was responsible for strong performance, even if the overall HM Capital fund has underperformed, sources told Private Equity International in prior interviews.

HM Capital’s 2006 Sector Performance Fund, which closed on $780 million in 2008, was generating a .42 percent internal rate of return since inception as of 30 September, 2012, according to performance information from the New Mexico Educational Retirement Board.

That’s a marked improvement from the way the fund looked in early 2012, when the return since inception was

Robert Sperry

negative 7.47 percent, according to New Mexico Educational Retirement Board documents. The numbers show that HM Capital had a strong year, producing a 48 percent IRR year-to-date, according to the pension system’s information. One of the investments that showed strong performance recently was Milk Specialties, which doubled earnings before interest, taxation, depreciation and amortisation since HM Capital acquired the company in late 2011, according to a person with knowledge of the investment. Moody's Investors Service upgraded Milk Specialties' credit rating last fall to reflect “the company's ongoing earnings growth, margin expansion and an expected improvement in its liquidity profile” after a refinancing.

While the Sector Performance Fund at one time looked like it might not return LP capital, its recent strong performance is showing that it will likely return capital and possibly provide investors a small return, according to one LP source.