Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Excellere Capital Fund III, L.P.
The New Jersey Division of Investment (“Division”) is proposing an investment of $50 million in Excellere Capital Fund III, L.P (“Fund III”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.
Excellere Partners LLC (“Excellere” or the “Firm”) is a lower mid-market private equity investor which partners with entrepreneurs and management teams in high-growth industries with a buy-and-build strategy. Fund III will target companies with primary operations in North America within the business services, energy services, healthcare, and industrial technology & service industries.
The Division is recommending this investment based on the following factors:
- Strong Track Record: Excellere’s prior two funds are consistently top-quartile (Fund I (2007) – 33.00% Net Internal Rate of Return (“IRR”), 2.13x Multiple of Invested Capital (“MOIC”); Fund II (2011) – 45.89% Net IRR, 1.51x). Also noteworthy, the two previous funds have already returned 1.82x and 0.91x of called capital, respectively.
- Operational Performance: Since inception, the Firm’s 16 portfolio companies have averaged revenue and Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) growth of 93% and 40%, respectively. In addition, Fund II’s unrealized portfolio has achieved organic revenue and EBITDA growth of 18% and 25%, respectively. Excellere’s transaction entry multiple, including add-ons, has also been impressive. For the nine realized investments, the blended entry multiple was approximately 6.5x while the blended exit multiple was over 10.0x.
- Differentiated Investment Strategy: Excellere’s strategy is very process-oriented and regimented. The Firm’s focus on its core industries and insistence on becoming experts in those areas positions them favorably and allows them to generate unique deal flow. Even more unique is the Fund’s value creation process, which hinges on partnering with entrepreneurs. Entrepreneurs typically roll over 20-40% ownership into the new transaction, while objectives and plans are laid out very early (often before the deal is closed) to make sure both buyer and seller are aligned with the plan for the company. This plan typically entails putting processes, compliance and systems in place at the portfolio company so it can then grow as an institutional quality company and be attractive to corporate and larger financial buyers.
- Firm Discipline: Fund III is well oversubscribed and could raise multiples above its hard cap of $550 million. However, the Firm has chosen not to raise additional capital and will continue at a fund size in which they’ve been extremely successful. This is not common among the majority of private equity funds, which typically start with small fund sizes, have success and go on to raise much more sizeable amounts of capital. Excellere believes that model could lead to lower returns.
- Conservative Use of Leverage: Excellere’s investment strategy is based upon growth and strategic and operational enhancements; therefore the Firm is less reliant on the use of leverage and conservatively capitalizes its portfolio companies. The weighted average net total leverage of Fund I and Fund II’s sixteen platform investments at acquisition was 2.5x EBITDA.
- GP Commitment/Team Alignment: The GP’s commitment of 5% of committed capital is well above the industry norm and its commitments to this fund and prior funds makes up a substantial portion of the GP’s net worth. It should also be noted that carry distribution from the Firm’s top partners to the rest of the team has increased from 10% in Fund I to 37% in Fund III. In addition, as the Firm promotes or hires during the Fund’s life, the increase in carry only comes out of the co-founders’ portion, therefore not diluting the rest of the team.
A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.
Division Staff and its private equity consultant, Strategic Investment Solutions, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.
As part of its due diligence process, staff determined that the fund has not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’s potential investment.
We will work with representatives of the Division of Law and outside counsel to review and negotiate specific terms of the legal documents to govern the investment. We have obtained a preliminary Disclosure Report of Political Contributions in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) and no political contributions have been disclosed. We will obtain an updated Disclosure Report at the time of closing.
Please note that the investment is authorized pursuant to Articles 69 and 90 of the Council’s regulations. Excellere Capital Fund III, L.P. will be considered a private equity buyout investment, as defined under N.J.A.C. 17:16-90.1.
A formal written due diligence report for the proposed investment was sent to each member of the IPC and a meeting of the Committee was held on July 9, 2015. In addition to the formal written due diligence report, all other information obtained by the Division on the investment was made available to the IPC.
We look forward to discussing the proposed investment at the Council’s July 22, 2015 meeting.
Source: State of New Jersey State Investment Council