The funds in this year's Hispanic Business 500 directory illustrate both of the currently strong inflow and outflow trends.
Luis Nogales, managing partner of the $99-million Nogales Investors Fund I, is drawing investors for a second fund estimated to close early next year at $200 million. While his current fund focuses on companies with revenues of $5 million to $20 million, the new fund could target slightly larger firms with as much as $30 million in revenue.
Palladium Equity Partners, currently managing its second fund with $231 million in equity capital through Palladium Equity Partners II LP, is in the process of closing a third fund with a target of $500 million. For this fund, Palladium Equity Partners III LP, Palladium has capital commitments from Spanish bank Banco Bilbao Vizcaya Argentaria, the California Public Employees' Retirement System, New York Common Retirement Fund, the Los Angeles Fire and Police Pension Fund, and others estimated, according to industry sources, to $420 million. Palladium declined comment on the status of fund raising.
Substantial transactional and fund-raising action is also taking place at Bastion Capital. Once completed, the sale of all Bastion I's investments in late 2004 will yield a final gross IRR of 25.2 percent. Acon-Bastion is raising Bastion II with a $300 million target to focus primarily on Hispanic middle-market investments in the United States. The State of New York will be an anchor investor in Bastion II with a commitment of $65 million.
According to founding partner Guillermo Bron, although Bastion I is closed and Bastion II is still raising funds, Acon-Bastion is already making investments in the U.S. Hispanic market, having invested $150 million recently in three companies through a Special Purpose Investment Vehicle.
The firms have moved swiftly this year on investments. Mr. Maruri, who manages Hispania Capital with principal Carlos Signoret, says the fund recently purchased a controlling interest in survey firm Eastern Research Services Inc., and expects to add two more firms to its active portfolio by June. Nogales Investors also expects to add two more firms to its portfolio, and Palladium Equity in early March sold Phibro Animal Health Corp., one of six active portfolio companies.
Palladium Equity managing member Marcos Rodriguez says the firm – which focuses on companies in the U.S. Hispanic market – reviews as many as 200 potential investment opportunities a year, and is seeing a growing number of opportunities.
"The capital flow has not matched the growth in the demographics and disposable income that has come from that economic growth and the hard work of Hispanic entrepreneurs," Mr. Rodriguez says. "There are companies that are focused on the U.S. Hispanic market that are extremely attractive and we are continuing to see very exceptional opportunities."
Some fund experts note that with the influx of private equity funds looking for investments, a "barbell theory" is emerging: With lots of funds in the $500 million to $1 billion range all going after the same size investment, an auction environment may be driving prices to overvaluation.
"What is happening in the private equity market is that it is so competitive at the larger level, they're bidding up prices," says Mr. Maruri. "Hedge funds are increasingly looking at private equity. We're not feeling the increased competition but it could lower the costs of capital and I think in the long term it will create distortions. The risk-reward will drop precipitously."
Still, Mr. Nogales and others say more funds are needed for mid-market investments. "The companies on the Hispanic Business 500, for example, have grown significantly over the past 10 years and the amount of capital has not been available at the same rate," Mr. Rodriguez notes, adding that he also sees growing opportunities for $100 million companies, and larger, as well.
Fund experts note that continuing success will require disciplined and expert management of their portfolio companies. With a reliance on debt financing and a responsibility to add value to each company, cash is viewed as a scarce resource. Using equity to maximum advantage is essential.
"Every time you draw down, the clock is running," says Mr. Nogales. "There is pressure and it is intense. You better have a plan and do it real fast. There is a fiduciary responsibility with investors' money."
Most of the funds take a majority owner or significant minority (40 percent) stake in the companies, while fund executives serve on the board and actively work with company owners to provide consulting, senior-management experience, and networking in addition to capital.
The firms maintain an independent view, taking an active role as shareholder with the overarching understanding that within a specified time frame they must be positioned to sell the company for more than they paid for it.
"One of the great features about this business is that while we track [internal rates of return], the ultimate goal is what happens at the end," says Mr. Nogales. "The big bang comes when you sell the company. There's a beginning and end and you can't fudge the numbers. Either that was your performance – or it wasn't."
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