PE HUB News: “L Capital, the PE arm of an executive search firm for sponsors, eyes second fund”
By Sarah Pringle
SAN DIEGO & SAN FRANCISCO, CA
- Inaugural fund raised ~$20 mln in December 2016
- LP base: wealthy investors and execs, a few family offices
- Firm gains co-investment rights through pre-deal advisory and executive-search services
As L Capital gears up to launch a fundraising process for its second fund later this year it won’t be seeking out traditional investors.
That’s because L Capital, which makes co-investments in technology, media and telecom companies, isn’t any ordinary private equity firm.
To start with, the firm is the equity investment affiliate of Renovata & Company, an executive headhunting firm that serves exclusively the PE community.
This alone is unique in the world of recruiters. Bart Foster, L Capital co-founder and managing partner, said the closest “mechanical idea” to the firm is Bain Capital, which in the ’80s spun out of Bain & Co, the consulting firm. The pair of Bains, however, aren’t affiliated in any way.
L Capital is investing out of L Capital I LP, which in December 2016 collected just north of $20 million in total capital commitments.
A fundraising process for its second fund is expected to kick off midyear, with a first closing expected in early 2019, Foster said.
Update: L Capital 2 LP will target $50 million in total capital commitments, and will seek investments across the industrial, consumer, healthcare and TMT industries.
L Capital leverages its consulting services to cherry-pick co-investments, gaining rights to such deals through the executive-search engagements and pre-deal advisory offered through LR Group and LTS Advisors, respectively.
“At a fundamental level, we are offering value to PE firms during the diligence phase — made possible through the people in our network — and monetizing that through co-investments,” Foster said.
And in a world of high valuations and fierce competition, PE firms are eager to find proprietary deal flow and differentiating investment angles. L Capital has tapped into this demand: “We think our network of people can be fundamental to both. … Unique deal insight is what we’re selling to PE funds,” he said.
For example, L Capital about a year ago co-invested alongside New York’s Wicks Group in Gladson Holdings, which offers digital content for the consumer-packaged-goods industry.
The co-investment came after Lancer was tapped to provide pre-deal diligence and executive-search services for Wicks, which ultimately gave rise to the hiring of Paul Salay as CEO of Gladson.
L Capital in 2017 was engaged on 24 diligence-stage projects with PE funds, Foster said. Of those, a dozen were associated with completed deals and co-investment rights, and four of those L Capital ultimately opted to co-invest in, he said.
The firm completed five investments, including one this year, of its debut fund.
Besides the Gladson deal, that includes Australia/New Zealand payroll outsourcing company Ascender, which it co-invested in alongside a consortium led by Potentia Capital; GAL Manufacturing, done in partnership with Golden Gate Capital; Swedish startup Klarna, whose other backers include Permira; and Australian business-process-outsourcing provider Probe Group, whose majority owner is Five V Capital.
In addition, L Capital executed three pre-fund deals in 2015, and two of those have already returned more than 100 percent of capital, Foster said.
By design, L Capital in all these instances has limited itself on a couple things, the managing partner said.
One is that the fund makes co-investments only in situations in which it has already offered advisory services. At the same time, L Capital writes checks only alongside larger PE firms. The fund is always a minority investor, taking a 10 percent or less equity stake.
L Capital also makes co-investments only alongside buyout, growth buyout and growth equity funds, and will not back a venture-stage or cash-flow-negative business. Typical check sizes are $1 million to $5 million, Foster said.
Yet another defining characteristic is the firm’s LP base, whose Fund I investors include 48 individuals, most of whom are wealthy investors or executives, with a few family offices sprinkled in, Foster said. These individuals largely come out of the executive network accessed through LR Group.
And while in most ways L Capital is structured like a traditional PE firm, with typical management fees and carried interest, Foster said the fund has a three-year investment period and five-year harvest — a shorter life than a typical fund life.
It also aims to achieve a multiple of money invested of at least 3x and an IRR of at least 20 percent on its co-investments, Foster said.
From an LP perspective, the fund also allows high-net-worth investors access to deal flow and bulge-bracket firms they otherwise couldn’t get on their own, he explained.
In Foster’s eyes, L Capital is an “actively managed fund that has the diversification and demands of a fund-of-funds.”
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