Fledgling Funds Take Off

Overcoming skepticism about unproven ventures, three new PE firms emerge

There's a lot of talk about how demanding limited partners are these days, requiring proof of performance before they invest. It's considered especially tough for a new firm to raise a fund. And yet some of the biggest LPs are actively seeking nascent PE firms, and some new funds are actually flourishing in their first-time fundraising efforts. (Watch the video below.)

The California State Teachers' Retirement System (CalSTRS) is one LP that is paving the way when it comes to investing in new and next-generation private equity managers. CalSTRS, along with Invesco Private Capital, has launched a program with $550 million to invest in new and next-generation PE managers--those that are raising their first, second or third institutional fund.

Other LPs embracing the trend are the Illinois Teachers' Retirement System and the New York State Common Retirement Fund. Illinois Teachers recently approved an investment in Great Point Partners Fund II and invested in Siris Capital Group as part of its emerging managers program, while the New York fund has allocated $250 million to Farol Investment Advisers for private equity co-investments with the fund's new and emerging managers program.

Here is a trio of firms benefiting from the trend.

Siris Capital Group

In March 2011, the founders of Siris Capital Group LLC launched their first institutional fund with hopes of raising $400 million. By September 2011, the firm had $130 million in commitments. The New York firm then signed a deal to take private Tekelec, a publicly traded software company.

Closing the deal during the fundraising process turned out to be an advantage. "Many LPs became more intrigued with us when they saw us executing on our strategy," says Frank Baker, co-founder of the firm.

Siris' strategy is to invest in technology companies that are in distress. Baker and his partners have focused their careers on technology. Baker and Siris co-founder Jeffrey Hendren worked together in the mergers and acquisitions group of Goldman Sachs Group Inc. (NYSE: GS), where they met. The two left to join Ripplewood Holdings LLC, where they met their third partner, Peter Berger, and ran the technology investing efforts, says Baker.

In 2006, the trio left Ripplewood to invest on behalf SAC Capital Advisors, the hedge fund manager. Four years later, they decided to go out on their own. "We completed three transactions and had a significant liquidity event. Having developed a great track record, independent of Ripplewood, we felt like we were finally ready to raise our first institutional fund," says Baker.

Today, Siris is putting up to $250 million of equity into deals and looking to invest in companies with enterprise values of between $250 million and $1 billion. The firm focuses on "take privates" and employs about 20 people.

Tekelec, for example, developed technology for 2G and 3G networks, which was an issue when the world was already moving toward a 4G network. Siris restructured the company and implemented operational and structural improvements. After holding the company for just over a year, Siris sold it to Oracle Corp. (NYSE: ORCL) for $780 million.

In December 2012, Siris held a final close on its first institutional fund with $641 million, causing the firm to extend its hard cap. What's more, an investment that the Siris founders had made for SAC was exited by the hedge fund firm for a triple-digit return. That impressed potential Siris investors.

"We bought one business and sold one at an attractive return. LPs were really excited not only to see us in action, but because we have a unique strategy for investing in distressed technology companies," says Baker. "We were concerned about launching our first fund. I went to a handful of conferences for emerging managers and started meeting investors. It was totally bootstrapped in the beginning. The people I met at the conferences got us to our first close. No one in our first close was a Ripplewood investor."

The capital for the fund's first close came from limited partners that focus on new and emerging managers, including Credit Suisse Customized Fund Investment Group, Illinois Teachers, BAML Capital Access Funds, Muller & Monroe Asset Management and StepStone.

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