In the summer of 2013, Mark King and Dale Meyer of Denver-based buyout firm KRG Capital joined forces with Simon Bachleda from Eos Partners to form healthcare-focused Revelstoke Capital Partners.
Though the trio weren’t ‘first-time’ GPs per se, they felt it made sense for their nascent firm to raise capital on a deal-by-deal basis before marketing a traditional fund.
“Even in good fundraising environments, the first-time fund is always challenging,” Meyer says. “Before we had a fund in place, we did deals on a one-off basis.”
That helped to build a track record ahead of its traditional fundraise, which resulted in a final close on the fund’s $303 million hard-cap in November. The fund then acquired the businesses Revelstoke had purchased pre-fundraise.
Revelstoke is perhaps the classic example of when, how and why firms will employ deal-by-deal strategies.
So, too, is Texas-based Juniper Capital Management, another new firm, which has launched a pledge fund, or “fund-less sponsor vehicle”, as Juniper founding partner Louis Grabowsky characterises it, to do three to five deals in the mid-market manufacturing, industrial and infrastructure services sectors. Though structured slightly differently, the principle is the same: “We don’t request capital until we find deals,” Grabowsky says.
“It’s not a ‘new’ trend, but we’re certainly seeing a lot of so-called fund-less sponsor vehicles in the market as it’s hard for new firms to raise committed capital,” says a New York-based fund formation lawyer. “It is a way a lot of people get a toehold in private equity and certainly in the lower mid-market, where it’s more difficult to raise capital, it’s more common.”
But it’s not just first-timers looking to deal-by-deal structures, says MVision founding partner Hussein Khalifa. “You also see a few GPs going out on their own and going back to smaller deals,” Khalifa says. “Maybe they want to wind down their business over time, after having been very successful, and not commit to another 10 years in a fund structure.”
He adds that deal-by-deal approaches or pledge funds may also be interesting to some LPs seeking greater control over what they invest in than a blind-pool fund allows; rather than committing a large sum upfront, they can pass on a deal if it doesn’t fit their specific sector interest, for example.
That may also appeal to investors seeking an interim step towards direct investing, a strategy an increasing number of LPs have been pursuing or considering, partly to be more independent, avoid paying management fees, and to know where their capital is being deployed, Khalifa says.
“If [pledge funds] have a proven track record, why wouldn’t I go and do that?”