PE HUB News: “L Capital, the PE arm of an executive search firm for sponsors, eyes second fund”

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 Lancer Group, 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 o fBains, 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.

Deal sourcing
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 Lancer Group and Lancer Transaction Services, 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.

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.

Deal criteria
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 Lancer 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, heexplained.

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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