"People are feeling better, which has helped open the markets and made private equity fundraising much more robust," reports Terrence Mullen (pictured) of Arsenal Capital Partners, one of several firms that have raised successful funds in recent months. (Scroll down or click here forour video conversation with Mullen.)

The optimism about M&A that middle-market dealmakers have been expressing in our monthly surveys also seems to be shared by limited partners, who are returning to the asset class. The result is the most vibrant climate for fundraising we've seen in years. In 2013, 873 private equity funds reached a final close for a combined $454 billion globally, the highest raised since 2008, according to Peqin. Here are five winning fundraising strategies.

1. ARSENAL CAPITAL BUILDS COMPANIES

In 2013, Arsenal Capital completed a successful fundraising for Arsenal Capital Fund III LP closing with $875 million of committed capital. With a team of 29 experienced professionals, Arsenal has built industry franchises in specialty industrials and health care. The firm focuses on lower middle-market transactions between $50 million and $250 million of enterprise value. Arsenal backs U.S.-based companies with significant operations and growth opportunities both in the U.S and internationally. It may sound like the boilerplate description for any middle-market private equity firm, but when you dig deeper you find that it's this focus that has compelled limited partners to invest with Arsenal.

"The key to our success was our strategic company-building approach," says Mullen. "First, we go deep into our two sectors and identify growth trends or issues that need to be solved. Then, we intensively scout the market with industry experts to identify companies through which we can implement specific strategic opportunities. We then buy the initial platform and almost always combine it with another asset right at the beginning to create a step function in scale and market positioning."

Arsenal then works to scale the businesses over the hold period to position them for exits. Two-thirds of the firm's exits have been to corporate acquirers.

Arsenal's approach has created returns and opportunity for co-investment by limited partners. "LPs find it very attractive to have the ability to do co-investments," says Mullen. "Our previous fund generated 60 percent incremental co-investment for LPs. In Fund III, we have already completed eight new platform investments and again have generated 60 percent of co-investment opportunity for our LPs."

Arsenal added 20 new LPs to its new fund and has worked to make sure its investor base is diversified. For its most recent fund, the firm sought out new investors from the U.S. and overseas. The fund remains evenly split between U.S. and foreign investors, with investors from Asia and Europe. The firm had 20 investors in its Fund II and now touts 35 LPs in its latest fund, giving the firm a broader investor base and less concentration risk.

"In Fund III we were able to access a material number of new names. We found a meaningful number of European LPs interested to increase exposure to non-European markets and other U.S. private equity firms are benefitting from that trend also," says Mullen.

The New York-based firm's first fund closed with $300 million in 2002. The firm's second fund raised $500 million in 2006, with Forbes Private Capital Group serving as a placement agent.

"We've always had a clear vision for our strategy and our company-building approach. It took time to build our team, and over 14 years we have built a deeply experienced team. This is the bedrock of our capabilities," says Mullen.

For news of Arsenal’s latest transaction, read “Profiled PE Firm Arsenal Makes a Deal.”

2. GRYPHON BOASTS STRONG EXITS

"The key for us was that we generated substantial realizations in the pre-marketing period of our fund," says David Andrews (pictured), founder and CEO of Gryphon Investors.

Many would say during the past year it was a good time to be a seller. With that in mind, and the fact that Gryphon was preparing to raise another fund, the San Francisco-based firm went on a selling spree.

"When we launched the fund in March 2013, we were able to establish strong momentum with investors because they really understood our strategy and business model, and they saw it unfold before their eyes with our exits. We told both existing and potentially new investors during the pre-marketing period that we were going to generate substantial realizations, and we succeeded." In a 10-month period, Gryphon was able to complete more than $500 million of realizations, representing almost half of the capital the firm had invested in its history.

In September 2013, Gryphon closed its fund, Gryphon Partners 3.5, with $365 million, surpassing its $250 million target. In 2007, Gryphon closed Gryphon Partners III with $500 million.

"With the understanding that the fundraising environment was more difficult today, we set out to raise half of what we did for our previous fund, in less than half the time it would otherwise take," Andrews said. "Hence the 3.5, but when we started achieving our exits the investors became more interested and we wound up oversubscribed."

Gryphon is a lower middle-market firm that focuses on control investments in consumer, business services, health care, for-profit education and industrial companies. The firm has an eight-person operation resources group, and four of the firm's nine partners were operating executives. Gryphon has had an in-house operations group since the late 1990s.

Since Gryphon's fundraising in 2007, the environment had changed considerably. "We had a substantial number of LPs that were no longer investing directly in private equity anymore, so they were making primary fund investments or they had cut their allocations to private equity," says Andrews. So although the firm lost a number of investors, such as Sun America, AXA Financial and funds of funds, Gryphon also brought in new investors from Europe and the Middle East.

The good news is Andrews thinks it's easier today to raise a fund than it was even six to 12 months ago. "Fundraising has come back. It began to improve in 2013 from the real difficult lows. We went through an historical peak in the golden era of the mega fund, and we've rebounded from the lows that occurred after the Great Recession," says Andrews.

3. MTS DELIVERS REPLICABLE BUSINESS MODELS

MTS Health Investors LLC was launched in 2000 by Curtis Lane, who was previously a banker at Bear Stearns. He started one of the first health care focused investment banking practices at Bear. So it's no surprise that he went on to launch MTS to focus on the health care industry. The firm raised its first pool of capital from friends and family in 2001. Its second fund was the firm's first institutional fund. It was raised in 2007, taking in $120 million, and it had side pockets of capital available to invest as well. After successfully putting that capital to work, the New York firm went out to raise Fund III.

"To be consistently successful in health care, private equity investors need to be immersed in the industry," says Oliver Moses, a senior managing director with the firm. "We rely on our deep industry knowledge to identify attractive niches and we bring a broad array of industry relationships to accelerate the growth of our portfolio companies."

The firm held a final close on Fund III with $188 million in January. Fundraising started slowly, but after holding a first close and making a few investments, the process took off. "We added a good cadre of institutional investors, including funds of funds, endowments and family offices. Yet, every LP in Fund II that is still in the private equity business re-upped in Fund III," says Moses.

Moses admits fundraising wasn't easy. "Although the market has loosened up and LPs are allocating to private equity again, it's still a difficult market, and investors are doing a lot more due diligence and taking longer to commit. They are much more likely to push harder to be in the last close because they want to make sure there will be a viable fund and they often hope to get a free look at early fund performance. This puts more pressure on the GPs to get investors into the first close because LPs see it as a sign of momentum and success breeds success," say Moses.

The key to MTS's fundraising success is the firm's ability to articulate its investment strategy and show investors that it's a replicable process. "We can describe how our investment strategy works and LPs can conduct due diligence on the specific deals and validate that the strategy is actually implemented and driving value creation. Every aspect of an LP's diligence should triangulate back to the same definite investment strategy we described to them in our first meeting," says Moses.

MTS invests only in companies that deliver greater value for dollars spent in health care. The firm's partners identify industry-specific niches that they believe are poised to outperform and in which they feel strongly that they can add value, not just capital.

"We look for companies where we can move the needle in creating value through customer introductions, process improvements or other valuable industry introductions. We want to be able to do something that will accelerate the growth of the business," says Moses.

MTS's investment in Florida Gulf to Bay Holdings LLC was a typical MTS deal and the first investment out of MTS III. The Tampa, Fla.-based company provides anesthesia services to hospital and surgery centers.

"We targeted this company because of its industry position and our relationships that could help the company accelerate its earnings growth. Prospective LPs saw this early investment as an emblematic MTS transaction because we are able to apply our method with strong early results. This consistency in approach is what gives investors confidence that your past performance will be a harbinger for your future performance," says Moses.

4. RIDGEMONT OFFERS SEASONED PROS

Most new firms have very little chance of raising a first-time fund. Limited partners are generally looking to invest with teams that have strong returns and that they already have a relationship with. A new firm has to have something pretty compelling to convince investors to spend the time to do their due diligence on the firm and its partners, and then ultimately invest. For Ridgemont Equity Partners, it was the firm's strong team that got LPs excited about its first-time proposition.

"We had started fundraising in the fall of 2011 and everyone said it would be a challenging environment," says Travis Hain (pictured), a partner with the firm. "It certainly was a lengthy process, but given our track record as investors we were able to get to a successful close. Despite the fact that we were a first-time fund, we were a team that had two decades of experience. Our partners have been together for an average of 15-plus years. Our team and its stability was a powerful influencer on the investment base."

The Charlotte-based middle-market buyout firm spun out of the former Bank of America Capital Investors in 2010. Under Bank of America's regime, the PE arm only had one limited partner, Bank of America, and was more of a generalist firm. The principals of Ridgemont deployed more than $3 billion across 115 companies on behalf of Bank of America. When the firm spun out, it refocused on the four sectors it had the most experience in: basic industries and services, energy, healthcare, and telecommunications/media/technology. The firm set out to make investments of $25 million to $75 million.

In April 2013, the firm closed Ridgemont Equity Partners LP with $735 million of commitments. (For more coverage on Ridgemont and the closing of the firm's fund, see Ridgemont Closes $735 Inaugural Fund.)

It was the firm's first independent fundraise and exceeded a fundraising cap of $675 million. TPG Capital BD LLC served as the placement agent for the fund.

"Our breadth and depth is not common in the middle market. To sustain our growth and industry knowledge, we promote from within and focus on our mid-level and junior staff so they can become partners over time," says Hain.

The firm managed to garner a diverse base of global institutional investors for its first fund, mainly from Europe and Asia, including public and private pension funds, insurance companies, and sovereign wealth funds. Since the spin-out, Ridgemont has completed nine investments.

"We have methodically built our business over 20 years and it has resulted in the platform we have today," says Hain. (For more commentary from Hain on the middle market, see Ridgemont Acquires Aurora Parts and Middle-Market M&A On the Rise.)

5. TWIN BRIDGE TOUTS TRACK RECORD 

Twin Bridge Capital is a bit of a different animal. The firm recently closed on its $450 million Pacific Street Fund III, but the Chicago-based firm spends most of its time functioning as a fund of funds, investing in buyout funds. Additionally, Twin Bridge is active on the co-investing side. Twin Bridge looks to invest in buyout firms or companies in attractive industries with proven management teams, especially companies with an operational plan to create value and properly aligned incentives to keep all parties motivated. TwinBridge closed on its $500 million Pacific Street Fund I in 2005 and its $500 million Fund II in 2008.

Fund III will invest in North American middle market buyout funds. As an investor in buyout funds and a fundraiser, Twin Bridge partner Brian Gallagher (pictured) says, multiple factors play a role as to whether a private equity fund is able garner investor attention, but track record is a key component. "You need a good track record to get anywhere," says Gallagher.

Gallagher says the fundraising environment today is unlike anything he has ever witnessed.

"There are haves and have nots, and the haves are blowing through the market. It's about the team strategy and their track record," say Gallagher, who says more LPs are willing to put capital behind first time funds than ever before. "Managers of first time funds typically have track records at other firms. In the past, LPs have been unwilling to diligence all the managers and their past deals, but as LPs look for interesting opportunities to put capital to work, they are more willing to do the extra work it takes to back new funds."

Investors are also much more interested in vertical sectors these days and look for general partners who know how to source deal flow within a specific industry, such as healthcare or energy. "Simple financial engineering is not easily achieved anymore. Results need to be driven by growing Ebitda, doing tuck-in acquisitions and by bringing operational expertise to the investment," says Gallagher.

Going forward, Gallagher warns, fundraising will no longer be a once every four year process. "GPs need to be constantly courting LPs who came close or who make a lot of sense as investors in the future. It's now a year-in and year-out process," says Gallagher.

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Corrected April 21, 2014 at 2:19PM: 3468832918001