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September 20, 2004
Castanea Goes Outside for Fund II
by Kenneth MacFadyen
It's been a little more than two years since Newton,
Mass.-based Castanea Partners raised its debut fund the internally
capitalized, $75 million Castanea Partners Fund I. For the
firm's follow-up effort, however, Castanea went outside its
inner circle, and in early September closed the $207 million
Castanea Partners Fund II, L.P., the buyout shop's first institutional
vehicle.
Castanea exceeded its $150 million to $200 million targeted
range, bringing on seven new limited partners including Yale
University and Princeton University, as well as other endowments,
pensions and foundations. Like its first fund, the firm's
second fund also includes a chunk of its own capital.
"Raising this fund obviously gives us more powder and
allows us to diversify our own holdings, but most important,
this represents the appropriate next step for the firm to
build Castanea for the long run," Castanea Founder and
Managing Director Brian Knez told Buyouts.
While Castanea will have more capital at its disposal, the
focus will not change. The firm will continue to seek out
small- to mid-market investments, which Castanea defines as
businesses with enterprise values of between $25 million and
$100 million. The firm will also continue to seek out deals
in the publishing, education, business services, consumer
product, specialty retail and marketing services sectors.
The sector focus comes from the firm's founders, Knez and
Robert Smith, who from 1999 to 2001 shared co-CEO titles at
Harcourt General and high-end retailer Nieman Marcus. "One
of the reasons our sector mandate is broad is because we were
each brought up in Harcourt," Smith said. "At the
time, Harcourt General was essentially a public holding company,
with publishing, specialty retail and other consumer product
businesses in its portfolio."
Castanea will typically make equity investments ranging from
$10 million to $20 million, and usually looks for control
transactions, but if necessary will also engage in club deals
with other sponsors. Castanea pursues management buyouts,
private company sales, industry rollups, growth equity transactions
and troubled situations.
In putting the capital to work, Castanea has given the new
fund a jumpstart by rolling over three of the firm's four
investments from Fund I. Investments in healthy drink maker
FUZE Beverages, carry-out restaurant EatZi's and pharmaceutical
research publisher Decision Resources were all rolled over.
Lee Munder Capital Group, which received an $11.5 million
minority investment from Castanea in 2002, will not join the
others in the new fund. "From the limited partners' point
of view, it's about an alignment of interests," Knez
said.
So right off the bat, Fund II is a little less than 20% committed,
giving the firm roughly $167 million of dry powder for new
investments. Castanea expects to close two deals in the next
couple of months. The firm's Fund I had invested about $45
million of its capital prior to the raising of Fund II.
And while Fund II has gotten off to a quick start, Castanea
doesn't expect to keep up this pace going forward. "We're
not looking for lots and lots of deals," Smith said.
"We're looking to do seven or eight good deals. We need
enough resources here at the firm to add value after the investment,
and two or three deals per year make sense." For this
reason, Castanea limited its fund size to just $200 million.
Knez added, "We probably could've raised more money,
but this is what's appropriate. We're a small-market firm,
and from our perspective and our limited partners' perspective
it was prudent that we cut it off at around $200 million."
Email Kenneth.MacFadyen@thomson.com
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