BALTIMORE, Md. – Cahill, Warnock & Co. LLC expected a $100 million first close in June on its $250 million-targeted Cahill, Warnock Strategic Partners Fund II LP, said Richard Johnston, managing partner. The fund, which was launched in April, will back public companies and engage in late-stage venture capital, he added. Johnston said he expects a final close in November.
The vehicle is focusing on the service sector industry, and will make investments in business services, communications, health-care and education companies. Approximately 75% of the fund will be invested in micro-cap public companies that have a value of $250 million or less, Johnston said. The remaining 25% of the fund will go to late-stage private companies that are seeking final rounds of venture capital fund raising to fuel their growth. The vehicle will do deals throughout the U.S.
The fund aims to fill a void in a marketplace that does not currently cater to micro-cap companies, Johnston said. “A lot of these micro-cap stocks have limited analyst coverage, not a whole lot of liquidity and consequently limited access to institutional investors,” he said, adding, “but many are growing and need capital for expansion.” It is this capital that Cahill, Warnock plans to provide with this fund, he explained.
Johnston expects the fund to do a maximum of 25 deals, ranging from $5 million to $20 million in size, with typical deal sizes averaging about $10 million. He said the fund should have a four-year investment cycle.
Johnston was quick to point out that Cahill’s PIPE transaction will take the form of convertible securities. “We are not going to be taking common stock and just passively sitting there with it. We take senior, secured positions and work with these companies,” he said. At a certain point Johnston explained, Cahill, Warnock will convert its preferred holdings into common stock to sell for a profit, or possibly, distribute some of the common stock to its limited partners so they can sell it on their own.
Limited partners in Cahill, Warnock Strategic Partners Fund I LP, which closed on $125 million in 1996, included Computer Outsourcing Services Inc., InKine Pharmaceutical Company Inc., MedPlus Inc., Telescape International Inc. and Touchstone Applied Science Associates, as well as high-net-worth individuals. Johnston declined to identify any of the potential LP’s for the new vehicle. He did say that one of the firm’s 20 largest, existing institutional LP’s was considering not participating in the new fund. He declined to identify the investor in question.
Johnston said the firm would put up more than 1% of the fund’s total capital. The vehicle retains the industry standard 2% management fee and 80%/20% carried interest split. Fund I is now 90% invested in 18 deals. Johnston said it would do another one or two deals and be fully committed by the end of the summer. He declined to provide a rate of return for Fund I.