JF Lehman eyes year-end close on fifth flagship

Funds I and II generated huge loss ratios but changed strategy Fund III onwards brought the ratio to zero.

JF Lehman’s fifth fund is inching to a close that is expected by year-end, pension documents show.

The New York-headquartered firm is targeting $1 billion for JFL Equity Investors V and has received an additional $500 million in soft-circle commitments from new and returning investors, according to JFL’s presentation to Connecticut Retirement Plans and Trust Funds on 10 October.

According to a Securities and Exchange Commission filing, JFL Fund V held its first close on $401 million in July. With the additional commitments, the fund will gather $900 million, still $400 million short of its $1.3 billion hard-cap.

CRPTF re-upped $100 million in Fund V and had previously committed $49 million and $75 million to Funds III and IV respectively.

Fund V’s target is around 20 percent larger than its predecessor, which closed on $833 million in 2016. The increased fund size was justified because Fund IV, in addition to the $833 million committed capital, had an additional $166 million in co-investment capital across six of the nine deals as of 31 March, according to investment consultant StepStone Group’s presentation to the pension system.

JFL makes control investments in mid-market defence, aerospace, maritime, government and environmental companies with enterprise values between $50 million and $500 million in the US and UK.

Fund V will make 10-12 platform investments of between $35 million and $150 million and will aim to generate a 30 percent internal rate of return over its hold period. It has a 2 percent management fee on both total committed and net invested capital. Carried interest after the hurdle rate of 8 percent will be 20 percent with a 100 percent catch-up and a clawback provision.

The firm is led by three partners – Louis Mintz, Alexander Harman and Stephen Brooks – and the key person provision will be triggered if any of the three leaves the fund.

JFL started as a fundless sponsor in 1992 and raised its first institutional fund in 1997.

From Fund III onwards JFL refined its strategy to avoid highly competitive auction processes that lend themselves to aggressive valuations and high levels of leverage. Funds I and II suffered loss ratios of 45 percent and 35 percent respectively and since Fund III, the loss ratio has been zero percent, the StepStone presentation said.

Fund III generated an internal rate of return of 14 percent and a net TVM of 1.7x as of 31 March; much of the large gross-to-net spread of 8 percent and 0.5x for the fund was attributable to above average broken-deal costs, a budget-based management fee (not a 100 percent fee offset), and no recycling of fees and expenses. Many of these issues have been addressed in Fund IV and will also be reflected in the limited partnership agreement for Fund V, StepStone’s presentation noted.

JFL did not return requests for comment.